International Finance and Payments

1
International Finance and Payments
Academy of Economic Studies Faculty of
International Business and Economics

• Lecture VIII
• International Credit Market

Lecturer Cristian PAUN Email cpaun_at_ase.ro URL
http//www.finint.ase.ro
2
International Payments - review

• the payments in international business are made
  using specific techniques, in order to reduce the
  high default risk
• when the risk is low for the exporter can be
  used open account payments, bank drafts or
  documentary collection
• when the risk is too high for the exporter it is
  strongly recommend to be used the letter of
  credit (or cash in advance)
• the letter of credit is the most complex payment
  mechanism ensuring a reduced risk if the
  operation

3
International Credit Market
A. Credit Market (general situation)
4
International Credit Market
B. Credit Market (by the maturity)
World Bank "Global Development Finance", 2000 -
2001
C. Credit Market (by the destination)
World Bank "Global Development Finance", 2000 -
2001
5
International Credit Market
D. Credit Market (creditors by origin)
E. Credit Market (country distribution)
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International Credit Market - conclusions

• International Credit Market is the second
  financing alternative after bonds
• Last years, credit expansion was higher than
  bonds
• The developed countries have a net dominant
  position on international credit market
• In the developing countries the total credit
  tends to decrease
• Private sector becomes more important on
  international credit market (instead banks)
• Short term credits are dominant (instead long
  term credits)
• Syndicalized loans become more and more
  important.

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International Credit Market

• I. Short term credits
• Credits in advance
• Export credits
• II. Long term credits
• Syndicated loans
• Eurocredits
• Parallel loans
• Back to back credits
• Buyer credits
• Seller credits.
• III. Special credits
• Leasing / Factoring / Forfeiting

8
Short term credits
9
A. Short term credits Export Pre-financing
Producer
Exporter
1
4 - 5
2
6
3
Exporters Bank
Government
1 Signing an Export contract 2 Obtaining a
Credit 3 Refinance from public funds 4
Delivery of goods 5 Payment at the maturity 6
Credit reimbursement.
10
B. Credit based on B/E discount
Exporter
Importer
1
3
2
5
4
X Bank
Other bank
1 Export contract based on B/E payment 2 B/E
Acceptance by the importer 3 Presenting the
B/E to the X Bank in order to be discounted 4
Discounting the B/E on the local money market 5
Payment of the exporter.
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C. Importer Bankers Acceptance
1
Exporter
Importer
3
4
2
5
Exporter Bank
Importer Bank
5
1 Export contract containing a commercial
credit granted by the exporter (the importer will
pay at a specific maturity after delivery) 2
B/E acceptance by the importer bank 3
Presenting the B/E to the Exporter Bank 4 B/E
discounting to an Exporters bank 5 Payment at
the maturity.
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D. Exporter Bankers Acceptance
1
Exporter
Importer
4
3
2
5
Exporter Bank
Importer Bank
5
1 Export contract 2 B/E Acceptance by the
Exporter Bank 3 Presenting B/E to the
Exportes Bank or to other local bank 4
Discounting the B/E 5 Payment at the maturity
against B/E.
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E. Credit transfer
Exporter
Importer
1
2
3
4
5
Financing Company
Importers Bank
1. Export contract. Delivery of goods 2.
Credit transfer to a financing company
3. Payment against the B/E transfered
4. Payment at the maturity.
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F. Revolving Credit Agreements
Revolving Credit Agreement -- A formal, legal
commitment to extend credit up to some maximum
amount over a stated period of time.

• Agreements are frequently for three years.
• The actual notes are usually 90 days, but the
  company can renew them per the agreement.
• Most useful when funding needs are uncertain.
• Many are set up so at maturity the borrower has
  the option of converting into a term loan.

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G. Line of credit
Line of credit -- An agreement between a lender
and a borrower in which the borrower has access
to funds up to a specific amount during a
specific period of time.

• - The consumer may borrow as much of the line as
  needed and pays interest on the borrowed portion
  only
• - Payment amounts are revolving, based on the
  outstanding balance amount
• - If the funds are not totally used the borrower
  is submitted to pay some penalties in the favor
  of the lender.

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Long term credits
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A. Syndicated loans
1
Beneficiary
Lead Manager
2
Credit Management Group
3
4
Group of the participant banks
Credit Memorandum
5
Bank A
Bank B
18
A. Syndicated loans operations description

• Contacting a leader bank
• Creating the coordinating group (when the amount
  is important), analyzing the beneficiary,
  establishing the credit conditions
• Creating the group of participating banks
• Creating the credit memorandum (usually the 60
  from the credit is granted by leader bank and
  coordinating group, the remaining amount being
  obtained from participating banks, if the total
  credit it is not covered by them, the leader bank
  will make an offer to international credit
  markets by this credit memorandum)
• Obtaining money from other banks.

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B. Eurocredits
3
Beneficiary
Lead Manager
1
Bank A
4
Bank B
Bank C
2
5
Coordinating Group
4
Capital transfer from local markets
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B. Eurocredit operations description

• Contacting a leader bank
• Creating the coordinating group (when the amount
  is important), analyzing the beneficiary,
• Establishing the credit conditions by analyzing
  the beneficiary
• Contacting different banks that will provide
  funds trough revolving credit arrangements to the
  coordinating group
• Refinancing from local capital markets by issuing
  stocks and bonds.

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C. Seller Credit
5
Exporter
Importer
1
6
3
2
Exporter Bank
4
Guarantee bank
Export Credit Agency
22
C. Seller Credit operations description

• Import contract of an equipment
• Obtaining a guarantee letter against default risk
  for the credit
• Obtaining the seller credit based on export
  contract and guarantee letter. Delivering the
  goods to importer
• Refinancing the transaction from public funds
  (Export Credit Agency)
• Paying back the import at the maturity
• Seller Credit reimbursement

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D. Buyer Credit
6
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D. Buyer Credit operations description

• Import contract of an equipment
• Obtaining a guarantee letter against default risk
  for the credit
• Obtaining an insurance policy by importer for
  political risk associated to the buyer credit
• Obtaining the buyer credit based on export
  contract, political risk insurance policy and
  guarantee letter. Delivering the goods to
  importer and payment of goofs
• Refinancing the transaction from public funds
  (Export Credit Agency)
• Buyer Credit reimbursement

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E. Parallel Loans
1
Company A
Company B
Credit Contract
GBP Credit
USD Credit
3
2
Subsidiary of B
Subsidiary of A
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E. Parallel loan operations description

• Parallel loan contract
• Granting a credit directly from A Company to B
  subsidiary from USA expressed in USD
• Granting a credit directly from B Company to A
  subsidiary from UK expressed in GBP
• Lower cost than granting a credit from A Company
  to A subsidiary and vice versa
• Simplicity

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F.  Back-to-back  loans
1
2
2
Company B
Company A
Credit Contract
Bank A
Bank B
4
3
Credit in USD
Credit in GBP
Subsidiary of B
Subsidiary of A
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F. Back to back loan operations description

• Back to back loan contract
• Obtaining a credit in USD for Company A and a
  credit in GBP for Company B from their own local
  markets
• Granting a credit directly from A Company to B
  subsidiary from USA expressed in USD based on
  initial credit
• Granting a credit directly from B Company to A
  subsidiary from UK expressed in GBP based on
  initial credit
• Lower cost than granting a credit from A Company
  to A subsidiary and vice versa
• Simplicity
• The interest rates will not be negotiated as it
  is in case of parallel loan (the main problem)

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Special Credits
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G. Leasing contract
Banks
8
6
9
1
Leasing company
Importer
2
7
4
5
3
Insurance Company
Exporter
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G. International Leasing contract operations
description

• Signing a leasing contract for import of an
  equipment
• Indicating the provider of equipment
• Negotiating the contract
• Insurance policy for the equipment
• Delivering the equipment
• Refinancing from banks
• Paying the equipment
• Paying the leasing taxes
• Paying back the credits by the leasing company

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Types of leasing contracts

• Lease-back the sale of an asset with the
  agreement to immediately lease it back for an
  extended period of time.
• Direct leasing the producer directly leases the
  equipment to a company
• Leveraged Leasing the leasing company borrows
  from a lender to buy the asset that will be
  leased to the beneficiary.
• Financial Leasing Longer-term, fully amortized
  and the lessee is responsible for maintenance,
  taxes, and insurance.
• Operating Leasing Usually relatively short-term
  less than economic life of asset, the leasing
  company is responsible for maintenance / upkeep /
  taxes / service. The beneficiary has the
  possibility to cancel the contract at the
  maturity.
• Net Leasing in the leasing contract are not
  included the expenses with the maintenance of the
  leased equipment

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Financial Impact of the leasing contracts
A. Balance Sheet with Purchase (co. finances
100,000 truck with debt) Truck 100,000 Debt
100,000 Other assets 100,000 Equity
100,000 Total assets 200,000 Debt plus
equity 200,000
B. Balance Sheet with Operating Lease (co.
finances truck with an operating lease) Truck
0 Debt 0 Other assets
100,000 Equity 100,000 Total
assets 100,000 Debt plus equity 100,000
C. Balance Sheet with Financial Lease (co.
finances truck with a capital lease) Assets
under capital Obligations under
lease 100,000 capital lease
100,000 Other assets 100,000 Equity
100,000 Total assets 200,000 Debt plus
equity 200,000
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Leasing vs. Debt Financing Potential Benefits

• 1) Flexibility and Convenience
• Leases are easier, quicker and require less
  documentation.
• Leases are easier to have approved than capital
  budgeting projects.
• Leasing simplifies bookkeeping for tax purposes.
• Leasing allows synchronization of lease payments
  with the firms cash cycle.
• Leasing avoids the problems of ownership.

2) Lack of Restrictions Leases usually do not
have protective restrictions. 3) Avoiding Risk of
Obsolescence? Not really - only in cancelable
operating leases. 4) Conservation of Working
Capital Leases usually have a lower initial
outlay than a purchase.
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Leasing vs. Debt Financing Potential Benefits

• 5) Tax Savings
• Leases may provide a larger tax shield than that
  provided by depreciation.
• 6) Ease of Obtaining Credit
• It is often easier for riskier firms to obtain a
  lease than to obtain debt financing.

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Factoring with payment in advance (old fashion
factoring)
1
Exporter
Importer
2
3
4
5
6
Factoring company
Importers Bank
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Factoring with payment in advance (old fashion
factoring) Operations descriptions

• Export contract
• Delivering the goods
• Presenting the commercial documents for payments
  (invoices)
• Paying in advance the presented invoices (less a
  commission an a guarantee of 10)
• Paying at the maturity
• Transferring the money to the factoring company
• Notes
• The exporter should pay an interest rate for
  credit period
• The factoring company will be refinanced by the
  banks
• The guarantee will be paid back at the maturity
  and will cover the default risk
• The factor will administrate ALL the commercial
  transaction of the exporter

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I. Factoring with a payment at the maturity
1
Exporter
Importer
2
3
6
4
5
Factoring company
Importers Bank
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I. Factoring with payment at the maturity
operations description

• Export contract
• Delivering the goods
• Presenting the commercial documents to the factor
• Paying at the maturity
• Transferring the money to the exporter (less a
  commission)

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J. . Forfeiting
1
Exporter
Importer
2
3
4
5
Forfeiting Institution
Importers Bank

• Forfeiting vs. Credit transfer Forfeiting is a
  long term financing operation
• Forfeiting vs. Factoring Forfeiting is used for
  a single transaction
• Forfeiting vs. Discounting the Banks Drafts
  Forfeiting is a long term financing operation and
  the Forfeiting institution will be refinanced
  from international financial markets using long
  term credit techniques or capital market
  techniques (IPO, securitization)

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J. . Forfeiting operations description

• Export contract
• Delivering the goods
• Presenting the commercial documents to the
  forfeiting company
• Paying the transaction against presented
  documents
• Transferring the money to the forfeiting company
  at the maturiy
• Note
• The exporter will pay an interest rate
• This transaction is used when the Exporter rating
  is too low and international market is not
  accessible for him (the forfeiting company will
  be refinanced from international markets)

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International Credit Final Conclusions