ICTF's Global Credit Professionals Symposium April 20, 2015

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1 The ICTF Best Practices and Ideas Exchange Forum: Export Credit Risk Mitigation Alternatives and Trade Finance Solutions Addressing the Needs of International Companies ICTF's Global Credit Professionals Symposium April 20, 2015 Buddy Baker, VP/Manager, Global Trade Solutions - Fifth Third Bank Alan Andrews, SVP Global Trade Finance Group - PNC Bank David Huey, President Atradius Trade Credit Insurance Andre Python, Vice President Underwriting - FCIA

2 Tools for Credit Risk Mitigation Letter-of-Credit-related techniques Guarantees Documentary-Draft-Collection-related techniques Open-Account-related techniques FX contracts Unconfirmed L/C Confirmed L/C 'Silent L/C confirmation' Standby L/C Independent/demand guarantee Accessory/contract guarantee, surety bond Sight draft, 'documents against payment' Avalized draft & forfaiting Factoring Non-recourse sale of receivables Credit insurance Credit derivatives (CDSs and A/R puts) Forwards & futures Options

3 4 Very High Different Risks Require Different Tools Unconfirmed LC Cash in advance Demand guarantee or standby LC Unconfirmed or confirmed LC Cash in advance Local guarantee or confirmed standby LC Demand guarantee or standby LC Confirmed LC Cash in advance Local guarantee or confirmed standby LC Cash in advance Confirmed LC Customer Risk 3 High 2 Moderate 1 Low Unconfirmed LC Demand guarantee or standby LC Factoring Credit insurance (commercial risks) Confirmed Authority to Pay Factoring D/P collections D/A collections w/ forfaiting Credit insurance (commercial risks) Unconfirmed LC Authority to Pay Open account D/A collections Factoring Unconfirmed or confirmed LC Local guarantee or confirmed standby LC Demand guarantee or standby LC Credit insurance (commercial risks or comprehensive) Confirmed Authority to Pay D/P collections D/A collections w/ forfaiting Credit insurance (commercial risks or comprehensive) Unconfirmed or confirmed LC Authority to Pay Open account D/P collections D/A collections w/ forfaiting Confirmed LC Credit insurance (comprehensive) Local guarantee or confirmed standby LC Confirmed Authority to Pay Confirmed LC D/A collections w/ forfaiting Credit insurance (comprehensive) D/P collections Confirmed Authority to Pay Credit insurance (political & economic risks) D/P collections D/A collections w/ forfaiting Countertrade Confirmed LC Credit insurance (comprehensive) Cash in advance Local guarantee or confirmed standby LC Confirmed Authority to Pay Confirmed LC D/A collections w/ forfaiting Credit insurance (comprehensive) Cash in advance Confirmed Authority to Pay Credit insurance (political & economic risks) Cash in advance D/A collections w/ forfaiting Countertrade NB: This document is for illustrative purposes only, and is not intended to delineate the recommendations of Global Trade Risk Management Strategies or the ICTF regarding risks associated with international trade 1 Low 2 Moderate 3 High 4 Very High Country Risk Denotes High to Very High Risk areas which may require significant risk neutralization

4 What Is Credit Insurance Trade Credit Insurance Covers: Insolvency and Bankruptcy of a Buyer Protracted Default of a Buyer Transfer Risk of a Foreign Country Pre-Delivery Risk May Be Covered

5 Why Credit Insurance? Protect Against Non-Payment Risk Expand Sales to New and Existing Customers Facilitate Attractive Bank Financing Supplement In-house Credit Risk Management

6 Products For Companies As Insured Multibuyer Portfolio Policies Non-Cancelable Limits Policy Pay-As-You-Go Policy Multibuyer Key Account Policies Single Buyer Policies Short Term or Medium Term Tenor Banks Can Become the Loss Payee on Their Clients Policies

7 Products for Banks As Insured Supply Chain Financing Purchase of Receivables Payables Financing Structured Trade Financing Import, Export, Pre-Export Letters of Credit Non-payment Coverage for Non-honoring of Letters of Credit Single or Multiple Issuing Banks

8 Credit Insurance Applicability Breadth Coverage Open Account, Time Draft Collection, Sight Draft Collection Repetitive sales to the same buyers; traditionally whole turnover of all export sales not covered by L/Cs or avalized drafts, but coverage can be highly tailored Up to 90% (sometimes 95% for sovereign buyers) Residual Exposure Contract dispute Improper documentation for filing insurance claim Variations Whole turnover Key account Single buyer Credit insurance may also be cancelable or non-cancelable and may or may not provide discretionary limits

9 Credit Derivatives Applicability Breadth Coverage Residual Exposure Variations Credit default swaps A/R puts The derivative buyer stands to lose money if the event occurs, usually because they are holding on to receivables, bonds, or other obligations of the underlying party Very narrow derivative writers only follow very large companies and certain government bonds If the specified event occurs, the difference between the covered amount and the market value of the underlying obligation will be paid, whether the derivative buyer has actually suffered a loss related to the event or not The derivative buyer may suffer a loss and yet not be able to collect on the derivative because the event did not occur

10 Commercial Letters of Credit Applicability L/C terms Breadth Transactional although a program can be developed to cover multiple transactions Coverage 100% Residual Exposure Country risks and commercial risk of the issuing/confirming bank (see below) Court injunction blocking payment (see below) Discrepancies between the L/C requirements and the shipping documents Variations Unconfirmed L/C Confirmed L/C (shifts country and commercial risks to confirming bank chosen by the issuing bank) Silent L/C confirmation (shifts country and commercial risks to confirming bank chosen by the beneficiary and protects against court injunctions)

11 Standby Letters of Credit & Demand Guarantees Applicability Breadth Open account with standby L/C. The standby L/C may cover the full credit limit or only the amount above the seller s normal limit for the buyer. Multiple, repetitive sales to the same buyer Coverage Up to 100% Residual Exposure Country risks and commercial risk of the guarantor Discrepancies between the guarantee requirements and the documents, notably failure to present prior to expiration Court injunction blocking payment Variations Unconfirmed standby L/C Confirmed standby L/C Demand guaranty Note: an accessory guaranty is NOT the same thing

12 Forfaiting Applicability Breadth Time draft collection Transactional Coverage 100% Residual Exposure Contract repudiation Refusal of buyer to accept drafts or of buyer s bank to avalize drafts once accepted Variations Avalized drafts Trade acceptances (non-avalized drafts)

13 Sale of Receivables Applicability Open Account Sales to companies in Western Europe, U.S.A./Canada, Japan, Hong Kong Breadth Repetitive sales to the same buyers; usually whole turnover on a country-bycountry basis Coverage 100% Residual Exposure Contract repudiation Contract dispute Variations Factoring (country risks not covered) Delcredere (transactional) Sale of insured receivables (coverage at insured percentage)

14 Foreign Exchange Contracts Applicability Breadth Sale (or potential sale) denominated in foreign currency May be transactional or part of an overall FX hedging strategy Coverage 100% of exchange rate decreases with potential to profit from upward movement in the value of the foreign currency Residual Exposure Forwards & futures: In the event the sale is canceled, the exporter is still liable to deliver the agreed amount of foreign currency to the bank and may have to purchase the currency at a higher rate than it is being sold for Options: The exporter must always pay the amount required to purchase the option, even if the option is never exercised (i.e. if the goods are never shipped or if the value of the foreign currency goes up) Variations Forwards Futures Options

15 Export Financing Structures Pre-Export Financing Exim-/SBA-guaranteed working capital loans Post-Export, Short-Term Financing Usance L/Cs Negotiation of L/C documents Time drafts ( trade acceptances ) Insured trade acceptances Export bills financing Sale of individual receivables ( Delcredere ) Sale of receivables covered by standby L/Cs Sale of insured receivables Factoring B/As not under L/Cs Asset-based borrowing Securitization of receivables Post-Export, Medium- to Long-Term Financing Avalized time drafts (traditional forfaiting) ECA-guaranteed/insured post-export loans Privately insured medium-term installment notes = non-recourse = limited recourse = full recourse

16 What s Basel III About? Requires banks to use more sophisticated risk weighting Provides additional cushion against broad economic downturns Increases average capital from 8.0% on Risk-Weighted Exposures to 10.5% for most banks up to 13.0% for Large, Internationally-Active Banks up to 15.5% for Global Systemically-Important Banks Moderates favorable treatment of exposure to other banks (particular impact on exposure to foreign banks)

17 Risk Weights for Exposures to Foreign Banks under Basel III-Standardized Approach in the US Risk Weight for Banks < USD100b Risk Weight for Banks USD100b % 25% Sovereign CRC* 2 50% 62.5% 3 100% 125% % 187.5% OECD member with no CRC* 20% 25% No CRC* and non-oecd member 100% 125% *Country Risk Classifications (CRCs) are set by the OECD (available at

18 How Will Basel III Affect Trade Finance? When capital increases, pricing must increase to maintain return on capital (Banks shoot for 15% to 20% RAROC) Favorable treatment of letters of credit and exposures to foreign banks may be greatly reduced Pricing on confirmation and financing of export L/Cs will go up Pricing on purchase of insured receivables may go down or at least go up less than pricing for other forms of financing To achieve a 15% RAROC, some banks will need to charge 5.45% per annum to confirm a letter of credit (vs. 0.05% under Basel I)

19 The ICTF Best Practices and Ideas Exchange Forum: Export Credit Risk Mitigation Alternatives and Trade Finance Solutions Addressing the Needs of International Companies ICTF's Global Credit Professionals Symposium April 20, 2015 Buddy Baker, VP/Manager, Global Trade Solutions - Fifth Third Bank Alan Andrews, SVP Global Trade Finance Group - PNC Bank David Huey, President Atradius Trade Credit Insurance Andre Python, Vice President Underwriting - FCIA

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