Table Of ContentExport
Finance
Risks, Structures
and Documentation
Export
Finance
Risks, Structures
and Documentation
Richard Willsher
MACMILLAN
© Palgrave Macmillan 1995
Softcover reprint of the hardcover 1st edition 1995 978-0-333-65391-3
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Any person who does any unauthorised act in relation to this
publication may be liable to criminal prosecution and civil
claims for damages.
First published in the United Kingdom by
MACMTI..LAN PRESS LTD, 1995
Companies and representatives throughout the world.
ISBN 978-1-349-13982-8 ISBN 978-1-349-13980-4 (eBook)
DOI 10.1007/978-1-349-13980-4
A catalogue record for this book is available
from the British Library.
10 9 8 7 65 4 3 21
04 03 02 01 00 99 98 97 96 95
While every care has been taken in compiling the information
contained in this publication, the publishers and editors accept
no resposibilty for any errors or omissions.
Contents
Introduction XI
PART I: STRUCfURES, INSTRUMENTS AND PRICING 1
1 Introduction 3
2 Money Transfer 4
Paper payment methods 4
Electronic payment 4
3 Letters of Credit 9
Definition 9
Structure and terminology 10
Beneficiary review of credit details 12
Presentation of documents 15
Discrepancies 16
Payment instructions 18
Partial drawings 18
Bank's security arrangements 19
Structures involving letters of credit 22
4 Factoring 37
History 37
Forms of factoring 38
The benefits of factoring 40
Pricing 41
5 Forfaiting 42
Definition 42
History 42
The forfaiting market 43
Forfaiting, political risk and emerging markets 45
Market participants 46
v
Export Finance
Primary and secondary transactions 47
Exporter and importer 48
Software 48
Discount calculations 50
Other factors affecting a forfaiting transaction 57
Bills of exchange, promisory notes and avals 60
Supporting documentation 64
6 Buyer's Credits, Lines of Credit and Supplier's Credit 66
Definition 66
Buyer's credit 66
Lines of credit 73
Supplier's credits 75
7 State-Supported Export Credits 79
Introduction 79
The Berne Union and the consensus 79
Export credit guarantees and country categories 80
Interest rate subsidies 82
Premiums 83
Credit terms 83
Terms for goods 84
Grants, aid and mixed credits 84
Project financing and countertrade 85
8 Countertrade: Forms and Structures 86
Introduction 86
Structures 87
9 Multilateral Aid Agencies 96
Introduction 96
The World Bank 96
European Bank for Reconstruction and Development 102
European Investment Bank 104
Asian Development Bank (ADB) 107
African Development Bank (AFDB) 108
Inter-American Development Bank (IADB) 109
OPEC aid institutions 109
10 Project and Infrastructure Financing 111
Definition 111
Project drivers 112
Financing 113
vi
Contents
PART II: ANALYSING AND ASSESSING CREDIT RISK 119
11 Introduction 121
12 Commercial Risk, Corporate Risk and Credit Insurance 122
Banker's references 122
Credit agencies 123
Financials 124
Broker's reports 125
Industry grapevine 125
Press cutting services 125
Visit the customer 126
Credit insurance 126
13 Political Risk and Emerging Markets 128
Definition 128
Research 128
Political risk insurance 129
14 Performance Risk 133
15 Shipment Risk 135
16 Currency Risk and Hedging Techniques 139
17 Interest Rate Risk 143
18 Secured Transactions 145
19 Documentation Risk 148
Documentation - vital lifeline 148
20 Pricing Risk 151
21 Transfer Risk 154
Debt pipelines 154
22 Bank Risk 156
Description 156
Information 156
23 Summary of Risks 158
VII
Export Finance
PART III: DOCUMENTATION 159
24 General 161
25 Commercial Invoice 164
26 Packing List 166
27 Export Cargo Shipping Instructions 168
28 Standard Shipping Note 170
29 CMR Note 172
30 Bill of Lading 174
31 Letter of Credit 176
32 Letter of Credit Presentation Form 178
33 Certificate of Insurance 181
34 Certificate of Origin 184
PART IV: CASE STUDIES IN STRUCTURING FINANCE FOR
INTERNATIONAL TRADE 187
35 Introduction to Case Studies 189
36 Trading Scrap Metal - Using Letters of Credit 190
Terms of the trade 190
Terms of payment 191
Letters of credit 191
Documentary presentation and credit control 192
Conclusion 193
37 Pre-financing of Coffee Exports - Using Letters of Credit 194
Strengths and weaknesses 194
Structure 195
Benefit of the Facility 197
38 Trading Spices for Bicycles - a Simple Countertrade Operation 198
Structure 198
Timing 199
VIII
Contents
39 Forfaiting -Commercial Vehicle Sales 201
Structure 201
Discount 203
Benefits from the Transaction 203
40 Longer Term Forfaiting - Oil Industry Equipment to
Latin America 205
Background 205
Structure 205
Additional features 207
Investment bank's strategy 208
Placement and discount 209
Benefits 210
41 General Purpose Line of Credit 211
Background 211
Sale of equipment to telecommunications utility 211
Syndication and operation 213
Administration, interest and repayment 214
Benefits and beneficiaries 215
Glossary 217
Useful Names and Addresses 225
Bibliography 229
Index 231
ix
Introduction
World trade was expected to grow by US$755bn as a result of the Uruguay
Round of negotiations of the General Agreement on Tariffs and Trade
(GATT). During 1994 the worldwide trade in goods had already increased
by 9 per cent. The World Trade Organisation which took over from GATT
is continuing with the work of liberalising trade between nations, removing
barriers to the free movement of goods.
Of course every piece of merchandise sold worldwide needs paying for
just as it has since trade first began. Because trade is increasing at such a
rate, issues of payment and credit finance are becoming the concern of many
more people than before. They are important to everyone involved in inter
national sales and cannot be considered an esoteric subject understood only
by the trade financing departments of international banks.
The purpose of this book is to explain how payment is made and how
credit is extended to buyers of goods. Part I, 'Structures, Instruments and
Pricing', is designed to be a reference for the main techniques currently used.
But they are only techniques and, like a pianist's scales, they are merely
academic until harnessed for a greater purpose of performance.
'Performance' in the context of export financing means facilitating and
perhaps funding a purchase and sale of goods. The commercial transaction
and the payment mechanism bring with them a number of risk considera
tions which are examined in Part II, 'Analysing and Assessing Credit Risk'.
The effort to secure transactions against the risks involved means not only
using the right structure but also employing formal written documentation as
evidence that the transaction took place. Documentation becomes convenient
for counterparties to handle as proxy for goods themselves. International
trade and finance are heavy on paperwork - many would say dogged and
weighed down by it. That is why the documentation is examined in detail in
Part III.
Part IV is about harnessing some of the techniques, bearing in mind the
specifics of the underlying commercial trade in goods and applying a hefty
dose of common sense about what to do. The case studies are our pianist's
dress rehearsal before a live performance.
XI
