Session 7 of STC 391

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Session 7 of STC 391

• International Credit, Finance and Insurance

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Session 7 Agenda Elements of International
Finance

• Risk Management
• Finance Sources, Tools and Processes
• Insurance
• Export Financing

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Thanks for the Help

• Dagmar Grieder, International Banker
• Mark Hagan, the Wells Fargo Trade Bank
• Doug Smith, International Trade Center, UT San
  Antonio/ Austin Community College
• Camino Real and other Texas Export Councils

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Finance to Support Technology Commercialization

• 1. Risk Reduction
• Due Diligence Processes
• Credit Insurance
• 2. Capital
• Public and Private Sources
• Financing Mechanisms

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Risk Reduction
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Due Diligence

• The Process of Verifying
• financial strength/stability
• technical qualifications
• business reputation
• ability to perform
• integrity
• compatibility
• the accuracy of the info on all above
• Through 3rd party/independent sources

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Partner Selection

• Identify clear business objectives
• Match structure to strategy
• Clearly identify terms of agreement
• Harmonize legal/local conflicts
• Do NOT abdicate decision-making responsibility!
• Perform DUE DILIGENCE

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Partner SelectionStructural Issues

• Sales Rep in each country
• Advantages Low initial cost
• Disadvantages Limited control
• Distributor
• Advantages Low initial cost
• Disadvantages Limited control

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Partner Selection (cont) Structural Issues

• Liaison Office
• Advantages Better control
• Disadvantages Longer term
• Other Issues (aka win/win)
• cross licensing agreement
• licensing agreement
• joint venture options

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Managing Partnerships

• Agreement Tools
• NDA
• software evaluation agreement
• MOU
• employment contract
• services contract
• licenses and cross-licenses w/ performance
  requirements
• distribution contracts

Others?
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IP Protection ExploitationPartnerships

• Structure contracts to carefully address IP
  rights
• clear definition of license to use
• clear definition of joint ownership
• background/foreground definitions
• ensure mechanisms for enforcing IP rights

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Labor Issues

• Can you fire those whom you hire?
• What will it cost you to downsize or rearrange
  your enterprise?
• Labor force availability
• training/apprenticeships
• recruiting expatriot issues

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Cultural Considerations in Business Agreements

• Contractual relations grow out of business
  relations
• Common Law enforcement is always less
  clear/certain
• Be prepared to understand the differences between
  common practice and best practice

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Cultural Issues (cont)

• Face-saving is very important and may apply to
  either or both sides
• Different countries value assets differently
• eg. On insolvency labor may be paid ahead of
  credit

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Financing from a Partnering Perspective...

• Equity or Debt base?
• Home based or foreign sourced
• loans based on inventory or receivables
• Letters of Credit
• local incentives

Who are your partners? Why are they your
partners?
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Risk Factors - International

• Political
• Unexpected changes (country or regional)
• Military conflict
• Economic
• Economic change in specific countries, regions,
  or inter-regional
• Military conflict

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Risk Factors - International

• Commercial
• Buyer credit acceptability
• Information difficult to obtain
• Different financial standards
• Cultural/Business Standard Differences
• Language (Negotiation/Interpretation)

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Risk Factors - International

• Foreign Exchange
• Currency rate fluctuations
• Transfer Risk
• Availability of US Dollars
• Currency Restrictions/Licenses

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Risk Factors - International

• Time and Distance
• Shipping Hazards
• insurance coverage
• Freight Costs and Processes
• Customs
• quotas
• customs delays

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Risk Factors - International

• Government Regulations
• Special import or export licenses
• OFAC (Office of Foreign Asset Control)
• SDN (Specially Designated Nationals)
• also known as Export Denial Orders
• Boycott

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OFAC - Blocked Countries

• AFGHANISTAN (Cautions)
• BALKANS (Cautions)
• BURMA (MYANMAR)
• CUBA
• IRAN
• IRAQ
• LIBYA
• NORTH KOREA
• SUDAN
• SIERRA LEONE
• ZIMBABWE

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Boycotting CountriesCountries Participating in
the Arab League Boycott of Israel
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International Finance Tools and Processes
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Global Capital Resources

• Private Capital Sources
• Alternative Financial Vehicles
• Loans
• Equity
• Public and Quasi-public Resources
• Domestic Sources
• International Resources

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Private Financing

• YOUR BANK
• YOUR CUSTOMERS/Partners BANK
• A bank specializing in international banking

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Private Capital Sources

• Profit
• Venture Capital
• Joint Venture -- Capital from Partners
• Customers -- Capital from Customers
• Suppliers -- Capital from Suppliers

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Resource Examples

• Silicon Valley Bank
• Asia Development Bank, www. asiandevbank.com
• First American Trade Finance, www.firstamtrade.
  Com
• Bancomext, www. bancomext.gob.mx

• Bank of America, Bank One, Chase
• Netherlands Foreign Investment Agency,
  www.nfia.com
• American Bureau of Collections
• Japan Development Bank, www.jdb.go.jp

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Diverse Financing Resources

• Local Global
• Local Bank
• Community Export Loan Funds
• Venture Capital
• Customer/Supplier Financing
• State Financing Support Vehicles
• National Financing Support Resources
• International Financing Resources

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Beware of Definitions

• Conceptions of Venture Capital are not equal!
• China IDs ventures ? Raise funding. Ventures
  are fully operational companies. OR Government
  funding for business.
• Australia Venture Funds closer to US concept
  usually support later stage companies. However,
  pension fund flexibility is limited sources
  harder to find to build the funds.

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• International Payment Mechanisms

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Intl Payment Mechanisms

• Cash in advance
• Open account
• Letter of credit
• Documentary collection

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Cash in Advance

• Seems easy - if buyer agrees to do it!
• Buyer pays with no assurance of shipment
• Will you take a check?

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Open Account

• Buyer Credit
• payment occurs after merchandise is shipped and
  received
• Payment can be made by wire, ACH, draft, check,
  credit cards, or money orders. Paypal anyone?
• Sometimes combined with a partial payment in
  advance
• Can be enhanced by credit insurance

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Letters of Credit

• Involves banks as an active party
• Documents are exchanged for payment
• Banks make determination to pay
• Good for
• New Buyers
• Mitigating certain risks
• Buyer financing options

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Documentary Collection

• Banks facilitate, but not active parties
• Buyer credit issues remain
• Documents exchanged for payment
• buyer makes determination to pay, not bank
• can buyer get merchandise without documents?
• Good for
• smaller amounts
• established relationships

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Sales Terms Risk Chart
Exporter Sales Terms Importer
Risk Risk
high
Open Account Docs Against Acceptance Docs Against
Payment Time Letter of Credit Sight Letter of
Credit Cash in Advance
low
high
low
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EX
IM
Cash Up Front
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EX
IM
Cash Up Front
Open Account
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EX
IM
Cash Up Front Confirmed L/C Letter of
credit Docs Agst Pmt Docs Agst Accept Open
Account
!?
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Negotiating Sales Terms

• Buyer wants financing
• Seller wants immediate payment
• No one wants risk

This is NOT impossible!
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INTERNATIONAL TRADE PAYMENT TERMS
funds flow charts/ payment terms table
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• Letters of Credit Terminology
• Transaction Flows
• Payment Options

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Letters of Credit

• Definition
• A letter of credit is a document
• issued by a bank
• to an individual or corporation
• by which the bank substitutes its own credit for
  that of its customer
• Payable against presentation of documents which
  comply 100 with terms in LC

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Typical Documents Under L/C

• Draft
• Commercial Invoice
• Bills of Lading (Transport Docs)
• Packing Lists
• Certificates of Origin
• Insurance Certificates
• Inspection Certificates
• Beneficiary Certificates

Beware of Pitfalls!
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Regulations

• ICC Uniform Customs and Practices Publication 500
  (rev. 1993) - UCP 500
• Uniform Commercial Codes
• Federal Reserve Bank Regulations
• ICC Uniform Rules for Bank-to-Bank Reimbursements
  (1996) - URR 525
• ISP 98 - for Standby LCs

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Types of LCs

• Commercial (Documentary)
• Primary mechanism for payment
• payment triggered by presentation of LC documents
• Used for
• Import
• Export
• Sometimes for domestic shipments

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Types of LCs

• Standby
• Most often used as a default mechanism - other
  payment type used as primary payment method
• Plan B
• Uses
• Financial (for payment default)
• both domestic and international
• Bid and Performance Bonds
• Insurance, Real Estate, Government Regulatory
  Compliance (EPA)

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Other Types of Letters of Credit

• Irrevocable vs. Revocable
• Import vs. Export
• Sight vs. Time
• Confirmed vs. Unconfirmed

?
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Parties to a Letter of Credit

• Applicant
• Beneficiary
• Issuing (Opening) Bank
• Advising Bank
• Confirming Bank
• Negotiating Bank
• Reimbursing Bank

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LC Issuance Process
Buyers Country
Sellers Country
Sales contract
Buyer/Applicant
Seller/Beneficiary
Buyer applies for LC. Credit relationship requi
red
Sellers bank authenticates LC and sends to seller
Buyers bank issues LC and sends to sellers bank
Issuing Bank
Advising Bank
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LC Payment Process
Buyers Country
Sellers Country
Shipment
Buyer/Applicant
Seller/Beneficiary
1. Bene sends documents to bank 2. Bank
examines 3. If OK, bank starts payment process
7. Adv Bk pays bene
8. Iss Bk gets documents 9. They examine 10.
Docs released to buyer
5. Iss. Bk obtains funds from buyer
6. Iss. Bk pays Adv. Bk.
Issuing Bank
Advising Bank
4. Adv. Bk sends claim to issuing bank also
sends documents
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Payment Options

• Sight
• Payment effected when complying documents are
  presented
• documents must be correct
• May or may not occur immediately
• if payable in the US - 2 to 7 days
• if payable offshore - 7 to 21 days, maybe more
• LC terms may contain special provisions about
  timing

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Payment Options

• Time - Bankers Acceptances
• provides short term financing - 30 to 180 days
• defined in LC
• requires draft drawn with a defined tenor
• can be xx days from B/L date or other event
• can be xx days from Sight (as defined by
  accepting bank)
• negotiable instrument
• accepting bank obligated to pay at maturity
• can be discounted to exporter for earlier payment

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LC Confirmation

• What is confirmation?
• A second bank, usually the advising bank,
  undertakes the credit risk of the bank which
  issued the LC
• The confirming bank is now obligated to pay
  against documents in order
• A confirmation is an extension of credit, so the
  issuing bank must be creditworthy
• LC terms must contain request for confirmation

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• Letters of Credit Documentation
• Discrepancies

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Documents

• Buyer and seller must agree on documents
• Generally, documents will verify
• type of merchandise and quality/quantity
• how/when/where shipped
• insurance of goods - who, risks, how much
• Other documents may be needed for customs
  clearance
• Must correspond to shipping terms

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Incoterms 1990 2000

• Generally accepted terms developed by the ICC for
  the uniform interpretation of common contract
  clauses for carriage in import/export
  transactions
• Terms define the obligations of buyer and seller
  for segments of transport, fees and insurance
• Also defines where title passes

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Incoterms 1990 2000

• General/Multimodal/Container
• FCA, CPT, CIP
• Maritime Only
• FAS, FOB, CFR, CIF, DES, DEQ
• Non-existent
• FOB Airport (now FCA)
• FOR/FOT - Free on Rail/Truck (now FCA)
• CF - Cost and Freight (now CFR or CPT)

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Common LC Documents

• Draft
• Commercial Invoice
• Bill of Lading (ocean, air, rail, truck)
• Packing List
• Certificate of Origin
• Inspection Certificate
• Insurance Certificate

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Whats a Draft?
Draft must show Tenor (sight)
Date Payee (ABC Exporter) Amount Drawee
(Trade Bank) Signature Endorsement (on back)
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Discrepancies

• Two types of discrepancies
• ones that can be remedied by the bene prior to
  presentation at issuing bank
• buyer probably wont know they existed
• ones that cant
• these require approval by the buyer and the
  issuing bank
• missed critical dates (latest shipment, expiry,
  presentation)
• problems with the B/L
• third party documents

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Discrepancies

• Discrepancies can
• Cause payment delays
• Cause payment rejections
• Eliminate your risk protection
• Add extra time and cost to the transaction

Discrepancies CAN be avoided!
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To Pay or Not to Pay?
Documents Comply
Documents are Discrepant
GO!
Bank Must Refuse!
Bank Must Pay!
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Bank Error
PS!

• Improper Payment
• Bank may forfeit its right to be reimbursed by
  applicant

• Wrongful Dishonor
• Beneficiary sues bank
• Applicant sues bank

Bank can lose
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• Standby LCs

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Standby Letters of Credit

• Easy way to remember
• this type of LC stands by in case another event
  does not occur
• functions as a safety net or credit enhancement
• Typical uses
• Payment guarantees
• Bid and Performance Bonds
• Insurance

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Sample

• Open account sale - 30 days after shipment
• Established buyer, but PO larger than usual
• Buyer issues standby LC allowing seller to draw
  if payment not received by day 31
• Issuing bank takes on buyers credit risk
• LC requires draft, copy of unpaid invoice, and
  bene certificate of non-payment

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Sample

• If payment is received within 30 days, then LC is
  not used and expires
• If payment is not received, seller can draw under
  LC and receives funds from bank
• Documentation must comply with LC terms
• LC is often payable at issuing bank only

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• Insurance

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Receivable Insurance

• Allows exporter to extend open account payment
  terms
• Covers consumables, raw materials, spare parts,
  agricultural commodities, low cost capital goods,
  durables, services provided by US personnel
• Short-term policy

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Receivable Insurance

• Single-buyer and multi-buyer policies available
• Risks covered political, commercial, sovereign
• Deductible required
• Economical (as low as pennies/100)
• Insurers Ex-Im Bank, Lloyds, FCIB etc.

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Export Finance
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Public and Quasi-public Resources

• EX-IM Bank
• The Export-Import Bank of the US is an
  independent agency of the federal government,
  with one mission to help the private sector
  create and maintain American jobs by financing
  exports.
• Uses loan, guarantee and insurance programs to
  support over 300 B in exports of both goods and
  services.
• http//www.exim.gov/
• Note There are other country ex-im banks Get
  there from links through exim

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Export Finance

• Ex-Im Bank Working Capital Guarantee
• Medium-term buyer financing
• Forfaiting
• Third-party financing

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EX-IM Bank Services

• Working Capital Guarantee
• Short-Term, Multiple Buyer
• Small Business Services
• Short-Term Single Buyer
• Financial Institution Letter of Credit

• Bank Letter of Credit
• Medium-Term, Single Buyer
• Leasing
• Financial Guarantee
• Credit Guarantee
• Direct Loan
• Project Finance

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Ex-Im BankWorking Capital Guarantee

• Guarantee for lenders making working capital
  lines available to exporters
• Covers work-in-process, inventory, foreign
  receivables
• Eligible products must be at least 50 US content

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EX-IM Bank
higher risk

• Operating Policies
• Funds higher risk ventures which havent
  attracted private financing
• Under its short term insurance policies, US
  content must be at least 50.
• Medium and long-term deals require that any
  foreign content be financed externally
• Repayment assurances are required

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EX-IM Bank

• Additional Operating Policies
• Sale of military goods only supported if they are
  dual use.
• Small businesses (fed definition) get priority
  attention
• Environmental technologies get priority attention

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Medium-term Buyer Financing

• Direct financing available to foreign buyers
• Exporter paid immediately
• Terms 1-7 years
• Covers capital equipment
• Rates (based on US) generally lower than buyers
  local financing options

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Third-Party Financing

• Accommodates customers desire for extended
  payment terms and your desire for cash
• Requires close coordination
• Difficult to find financing sources around the
  world
• Can be either recourse or non-recourse back to
  seller

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EX-IM Bank Tools Definitions

• Letter of Interest (LI)
• used in sales negotiation
• indicates support, not financing
• may be a first step toward financing
• Preliminary Commitment (PC)
• exporter must have a specific deal
• Ex-Im runs a full analysis on players and deal

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EX-IM BankTools Definitions

• Final Commitment (AP)
• Application comes from foreign buyer or
  guaranteed lender when an export sales contract
  is about to be completed.
• Preliminary Project Letter (PPL)
• Indicates the general terms and conditions of
  Ex-Im financing offer

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EX-IM Bank Definitions

• Glossary
• Short-Term credit terms of 180 days
• Medium-Term 1-5 years, financing lt 10 million
• Long-Term gt7 years, gt 10 million
• Political Risk war, cancellation of import
  license, currency inconvertibility, expropriation
  by government
• Qualified 2 credit reports a financial
  statement

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Overseas Private Investment Corporation (OPIC)

• OPIC is a U.S. government agency that sells
  political risk insurance and loans to help U.S.
  businesses of all sizes invest and compete in
  more than 150 emerging markets and developing
  nations worldwide.
• OPIC charges market-based fees for its products
  and therefore it operates on a self-sustaining
  basis at no net cost to taxpayers.

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OPIC

• Complement the private sector by
• Managing risk with political risk insurance
  assisting particularly in developing countries.
• Providing financing through direct loans and loan
  guaranties OPIC can lend up to 250 million per
  project on either a project finance or corporate
  finance basis in countries where conventional
  institutions are often unable or unwilling to
  lend on such a basis.  
• Working with private capital through
  OPIC-supported funds privately managed
  investment funds that make direct equity and
  equity-related investments in new, expanding or
  privatizing companies. By providing long-term,
  patient growth capital and facilitating
  critically needed technology and management
  skills development, these funds act as a catalyst
  for private sector economic activity in the
  developing countries served.

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SBA Export Assistance

• Exporting Working Capital
• Guarantees up to 90 of a bank line of credit to
  cover short-term export working capital. Maturity
  cannot exceed 12 months. Companies must have at
  least one year of export experience.
• International Trade Loan Program
• Guarantees a bank line of credit up to 1.25M sto
  cover short-term export working capital and long
  term facilities equipment.
• Qualify if loan will foster substantial new
  market development OR an applicant has been
  adversely affected by import competition

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Immigration as Free Trade Policy

• Regulated Immigration mostly a 20th Century
  phenomena
• Is it part of Trade or more generically economic
  development?
• What are the market forces?
• What is Governments Role?