FIN 3163 Unit 3 slides (11).pptx

 1 Negotiations and Planning for Successful International Transactions Explains the need for effective planning of foreign trade ventures to ensure costs ar...

 1 Negotiations and Planning for Successful International Transactions Explains the need for effective planning of foreign trade ventures to ensure costs are controlled and the risks of doing business on the international market are managed 2 Payment Risk Assessment Describes the types of payment risks that are encountered by exporters and the financial tools that are available to help the exporter address those risks 3 Using Export Credit Agency Services for Financing and Mitigating Commercial Risks Explains the nature and the role of various export credit agencies (ECAs) while exploring the services ECAs offer that help alleviate cash flow burden and provide working capital support Continued… © 2017, 2020, 2021 FITT All Rights  4 Cash Flow Management Explores the necessity of cash flow planning when doing business on the international market, along with the steps to improving a company’s overall cash flow position 5 Disputes in International Trade Details the types of disputes – along with the key reasons for dispute – between counterparties; and this unit demonstrates dispute resolution mechanisms including Alternative Dispute Resolution (ADR) methods © 2017, 2020, 2021 FITT All Rights Reserved  Reflect on Your Experience Reflect on your past experience and answer the following questions to the best of your ability. 1 What are trade finance instruments? 2 How can trade finance instruments help mitigate risk of non-payment? Have you ever negotiated a contract on behalf of your company? What key 3 elements do you have to keep in mind when negotiating a contract on the international market? How do export credit agencies (ECAs) help foster international trade 4 transactions? 5 What products and services do ECAs offer? Continued… © 2017, 2020, 2021 FITT All Rights Reserved  Reflect on Your Experience Reflect on your past experience and answer the following questions to the best of your ability. A Senior Manager at Exports Inc. has sought your advice on building a payment structure that helps mitigate the risk of non-delivery and risk of not 6 receiving the ordered goods. What structure do you propose? How can ECAs complement your proposed approach? What sources of financing does an organization have available to finance 7 shortfall in cash? What happens when the exporter delivers the products but the importer does 8 not want to accept them? How do you think this type of dispute can be resolved? Commercial disputes are significantly more complicated than personal disputes. As such, companies draft contracts that aim to include all possible 9 clauses to avoid future disputes. What types of conditions should all parties stipulate in a contract? © 2017, 2020, 2021 FITT All Rights Reserved  International Trade Finance UNIT 3 Using Export Credit Agency Services for Financing and Mitigating Commercial Risks ◎ Global Export Credit Agencies ◎ Export Credit Agencies and Corporate Social Responsibility ◎ Export Credit Agency Models ◎ Export Credit Agency Products and Services © 2017, 2020, 2021 FITT All Rights Reserved  Why Is This Important? Export credit agencies (ECAs) are originally government agencies charged with supporting the development of exports. They assist in risk mitigation and thereby encourage the pursuit of opportunities in international commerce. provide export financing provide various types of risk insurance or guarantees ECAs are important contributors to the enabling of international trade. They are often highly expert in this field. © 2017, 2020, 2021 FITT All Rights  Why Is This Important? ECAs are a key resource to gather information on countries, industries, markets of opportunities as well as challenges around the world. The role of ECAs, and the respective services offered, help companies grow its sales volume on the international market while making sure to manage the risks they take when entering the international market. ECAs provide opportunities for collaboration between market players and to facilitate growth in exports. © 2017, 2020, 2021 FITT All Rights  Export Promotion Goods and services produced in one country but supplied to buyers in another are known as exports. International trade is made up of exports and imports. Exports are critical to market democracies because they provide people and businesses with access to a larger market for their products. Exporting offers plenty of benefits and opportunities, including: Access to more consumers and businesses. Diversifying market opportunities so that even if the domestic economy begins to falter, you may still have other growing markets for your goods and services. Expanding the lifecycle of mature products. © 2017, 2020, 2021 FITT All Rights  Global Export Credit Agencies Private Sector Export Credit Agencies/Vendors Export credit guarantors and insurers from the private sector are usually commercial general insurers with highly specialized skills in areas related to international trade. The leading private sector providers today include Atradius of the Netherlands https://group.atradius.com/ Coface of France https://www.coface.com/ and Alliance Trade formerly Euler Hermes of Germany https://www.allianz-trade.com/en_global.html Major risk insurers generate annual revenues of several billion dollars © 2017, 2020, 2021 FITT All Rights Reserved  Global Export Credit Agencies Public Sector Export Credit Agencies Public sector ECAs are governed by legislation that defines their raison d’être, the details of the mandate and the oversight framework to which the ECA is subject. Examples include: Export Development Canada (EDC) https://www.edc.ca/en/campaign/export-impact.html Export Finance Australia Export-Import Bank of the US https://www.exim.gov/ https://www.youtube.com/watch?v=ErwIlvQ_RVk © 2017, 2020, 2021 FITT All Rights Reserved  Global Export Credit Agencies Export Credit Agencies Around the World As mentioned, ECAs offer a range of financing solutions suited to the successful execution of the mandate of each ECA, as well as to the characteristics and trade objectives of their client base. Here are some examples of ECAs from around the world. U.K. Export Finance The United Kingdom’s ECA operates under the name of UK Export Finance (ECGD). Founded in 1919, the ECGD complements the private market by providing assistance to U.K. exporters, primarily through insurance and guarantees to banks. In the past, the ECGD portfolio has backed major oil and gas developments, as well as a number of dams. More recently, the ECGD has moved toward supporting shorter term export credits. The ECGD is accountable to the U.K. Secretary of State for Business, © 2017, 2020, 2021 FITT All Rights Reserved  Global Export Credit Agencies Export-Import Bank of the United States The Export-Import Bank of the United States (Ex-Im Bank) is the official ECA of the United States. It provides working capital guarantees (pre-export financing), export credit insurance, loan guarantees and direct loans (buyer financing). Ex-Im Bank is a federal government agency, which operates under a Charter that is periodically reauthorized by the U.S. Congress. Export-Import Bank of China Founded in 1994, the Export-Import Bank of China’s primary mandate is to facilitate the export and import of Chinese mechanical and electronic products, and assist Chinese companies in their offshore contract projects and outbound investment. It also aims to promote Sino-foreign relationships and international economic and trade cooperation. The Export-Import Bank of China is entirely owned by the Chinese government, and operates under the direct leadership of the State Council. As China is not a member of the OECD Arrangement on Officially Supported Export Credits, China EXIM is not bound by the same rules other participating ECAs. © 2017, 2020, 2021 FITT All Rights Reserved  Global Export Credit Agencies Euler Hermes Deutschland AG The German government has mandated the private companies Euler Hermes Deutschland AG and PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft to manage the official export credit guarantee scheme on its behalf. Euler Hermes reviews applications for officially supported export credit guarantees. Applications are then discussed in an inter-ministerial committee which is made up of the economic ministry, financial and development ministry, and the foreign office. The decision to approve an application must be unanimous. For a credit guarantee in excess of EUR 1 billion, the German parliament’s budget committee must also be informed. © 2017, 2020, 2021 FITT All Rights Reserved  Global Export Credit Agencies Export credit agencies (ECAs) support the full range of trade and investment activities, from major multi-year capital projects to aircraft sales and transportation systems, as well as exports by start-up, knowledge-based small businesses. © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agencies and Corporate Social Responsibility ECAs are expected to commit to, and adhere to principles relating to: the following: Corporate social responsibility The environment Due diligence Standards and expectations or modes of conduct of business Governance standards Transparency related to financial adjudication © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agencies and Corporate Social Responsibility, Continued ECA Watch is a coalition of NGOs monitoring activities and performance of ECAs on various issues Issues articulated by ECA Watch and other NGOs include: o Transparency, public disclosure and consultation on ECA policies and projects o Binding common environmental and social standards o Explicit human rights criteria to guide ECA operations o Binding criteria to bring an end to ECAs abetting corruption o An end to the financing of arms o The cancellation of ECA debt for the poorest countries © 2017, 2020, 2021 FITT All Rights  Export Credit Agency Products and Services ECAs provide significantly varying product and service offerings. When exporters or importers are aware of the product and service combinations available in the market, they are able to acquire competitive edge, while adequately mitigating risks in an international trade transaction. © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency Products and Services - Financing ECAs provide financing in support of international trade at various levels – they may finance major projects for governments, banks or the importer or exporter directly. ECAs activities vary in mandate and operational scope, including: o Leaving the financing entirely to private sector providers o Financing transactions that directly involve trade transactions o Providing financing related to the domestic business of a company that is engaged in international trade © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency Products and Services - Financing ECAs are active in loans of all durations and project finance. ECA financing helps exporters by providing funds to foreign importers who otherwise might not be able to make the purchase, and by assuming the repayment risks in place of the exporter. This is known as Buyer Financing Specific steps are involved in securing export finance See Figure 3.1 – Involvement of Export Credit Agencies in Buyer Financing © 2017, 2020, 2021 FITT All Rights Reserved  Involvement of Export Credit Agencies in Buyer Financing 1. Financing Proposal 2. Analysis of Proposal 3. Risk Analysis 4. Loan Negotiations 5. Loan Agreement 6. Delivery of Goods 7. Acceptance of Goods 8. Payment to Exporter 9. Repayment to ECA FIGURE 3.1 © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency Products and Services - Financing ECAs also offer structured project financing to make additional capital available to companies engaged in foreign trade. ECAs participate in international financing syndicates to advise, arrange and provide the required financing, while also supporting a project’s technical, environmental and social or documentation needs ECAs also provide secured loans to exporting companies to help the company finance their foreign operations or invest the funds directly into the foreign affiliate. © 2017, 2020, 2021 FITT All Rights Reserved  Supply Chain Finance Definitions A supply chain is a connected system of organizations, activities, information and resources designed to source, produce and move goods from origination to a final destination—typically from a supplier to an end customer. Modern supply chains are often very complex, spanning multiple countries and involving many steps Supply chain finance (SCF) is defined as the use of financing and risk mitigation practices and techniques to optimize the management of the working capital and liquidity invested in supply chain processes and transactions. SCF is typically applied to open account trade and is triggered by supply chain events. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements TABLE 3.1 © 2017, 2020, 2021 FITT All Rights Reserved  Supply Chain Finance Definitions Term Definition Portfolio SCF is a portfolio of financing and risk mitigation techniques and practices that supports the trade and financial flows along end-to-end business supply and distribution chains, domestically as well as internationally. This is a holistic concept that includes a broad range of established and evolving techniques for the provision of finance and the management of risk. Open account SCF is usually, but not exclusively, applied to open account trade. Open account trade refers to trade transactions between a seller and a buyer where transactions are not supported by any banking or documentary trade instrument issued on behalf of the buyer or seller. The buyer is directly responsible for meeting the payment obligation in relation to the underlying transaction. Where trading parties supply and buy goods and services on the basis of open account terms, an invoice is usually raised and the buyer pays within an agreed upon time frame. Open account terms can be contrasted with trading on the basis of cash in advance, or trading utilizing instruments such as documentary credits, as a means of securing Continued… payment. TABLE 3.1 © 2017, 2020, 2021 FITT All Rights Reserved  Supply Chain Finance Definitions, Continued Term Definition Parties Parties to SCF transactions consist of buyers and sellers, which are trading in collaboration with each other along the supply chain. As required, these parties work with finance providers to raise finance using various SCF techniques and other forms of finance. The parties, and especially anchor parties due to their commercial and financial strength, often have objectives to improve supply chain stability, liquidity, financial performance, risk management and balance sheet efficiency. Event driven Finance providers offer their services in the context of the financial requirements triggered by purchase orders, invoices, receivables, other claims, and related pre- shipment and post-shipment processes along the supply chain. Consequently, SCF is largely event-driven. Each intervention (finance, risk mitigation or payment) in the financial supply chain is driven by an event, or trigger, in the physical supply chain. The development of advanced technologies and procedures to track and control events in the physical supply chain creates opportunities to automate the initiation of SCF interventions in the related financial supply chain. Continued… TABLE 3.1 © 2017, 2020, 2021 FITT All Rights Reserved  Supply Chain Finance Definitions, Continued Term Definition Evolving and SCF is not a static concept but is an evolving set of practices using or combining a flexible variety of techniques; some of these are mature and others are new or leading-edge techniques or variants of established techniques, and many also include the use of traditional trade finance. The techniques are often used in combination with each other, and with other financial and physical supply chain services. TABLE 3.1 © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency Products and Services, Continued Insurance and Guarantees ECAs provide an extensive range of insurance and guarantee products and programs to facilitate international business: o Insurance on foreign accounts receivables o Solutions linked to the use of confirmed documentary letters of credit o Various types of risk and non-payment insurance o A range of guarantee products to help banks obtain collateral for issuance of letters of guarantees without freezing a company’s working capital ECAS sometimes will re-insure certain risks with selected insurance companies that agree to share or cover the original risk covered by the ECA. © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency Products and Services, Continued Export Credit Insurance In export transactions, risks are always present from the initial stages of market penetration through to expansion of market share. Credit insurance, also known as accounts receivable insurance (ARI) which was mentioned earlier, protects exporters against non-payment of receivables by foreign importers. Key factors to consider when purchasing export credit insurance: o Risks covered by insurer (political, commercial) o Extent to which risks are shared between insurer and insured party (co-insurance ratio) o Services provided by insurer, including credit reports and analysis and country risk information See Table 3.2 – Risks Covered by Export Insurance Policies (Commercial and Political) See Table 3.3 – Insurance Risk – Key Factors © 2017, 2020, 2021 FITT All Rights Reserved  Risks Covered by Export Insurance Policies Commercial Risks Foreign importer This can result from bankruptcy, chapter 11 in the United States, insolvency or other similar legislation Default The importer does not respect contractual obligations, and does not want to (or cannot) pay Refusal to accept The exporter has shipped according to the terms of the contract, or take delivery of but the importer will not accept the goods or take delivery. the goods Repudiation or The importer unilaterally terminates the contract unilateral termination of the contract Continued… Adapted TABLE 3.2 © 2017, 2020, 2021 FITT All Rights Reserved  Risks Covered by Export Insurance Policies Political Risks Blockage of funds The policies of a foreign government or the central bank with or transfer regards to the country’s currency or its convertibility can result difficulties in “transfer risk” (the risk associated with the conversion of currency from that of one country to that of another). This can result in situations where funds may not be accessible/available to the importer to pay the exporter. War, hostilities or An event such as a war, revolution or insurrection within the revolutions importer’s country, or even outside of that country, can prevent an exporter from being paid or can prevent the importer from complying with contractual obligations and payment undertakings in favour of the exporter. Cancellation of These cancellations, by the government of either the export export and import country or the import country, may prevent the exporter or the permits by foreign importer from fulfilling their respective obligations. governments Adapted TABLE 3.2 © 2017, 2020, 2021 FITT All Rights Reserved  Risks NOT Covered by Export Insurance Policies Export credit insurance does not cover losses from commercial disputes between exporters and foreign importers. Usually, these disputes must be resolved to the satisfaction of the insurer before claims are considered for payment. For example, if a foreign customer refuses to pay for goods on the grounds that the shipment was not what was ordered, the claim may have to be adjudicated by a court of arbitration in favour of the exporter before the latter could collect on the insurance policy © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Insurance – Risks and Premiums Insurers usually require some risk sharing on the part of the exporter to ensure the exporter acts in the best interest of both the company and the export credit agency (ECA). Having a stake in the transaction avoids, or reduces, the chances of exporters pursuing highly speculative business without regard for potential loss. Methods of risk sharing include: Adding a co-insurance ratio. In a 90 percent co-insurance policy, the insurer, for example, pays 90 percent of total claim while the exporter (the insured) absorbs the remaining 10 percent loss Deductibles: A deductible requires the exporter to take the first loss from an uncollected export receivable, up to a specified amount - generally serve to reduce the © 2017, 2020, 2021 FITT All administrative Rights Reserved costs the insurer would incur from  Insurance Risk – Key Factors Continued… TABLE 3.3 © 2017, 2020, 2021 FITT All Rights Reserved  TABLE 3.3 © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency Products and Services, Continued Guarantees and Wrongful Call Insurance Foreign contracts often require the exporter, through their bank, to issue letters of guarantee in favour of the importer. Banks require a 100% collateral to secure their position thereby restricting the exporter’s working capital – funds needed to manufacture ECAs have an export guarantee program that provides a guarantee to the exporter's bank so that the bank does not require the exporter to put up 100% collateral Benefits of a guarantee program: o Allowing the exporter to get more international contracts o Issuing more bonds o Becoming more competitive o Freeing up company’s cash flow © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency Products and Services, Continued Guarantees and Wrongful Call Insurance ECAs also offer an insurance coverage on the letter of guarantee to help insure against a wrongful call, called wrongful call insurance. If a customer decides that the exporter, in their opinion, does not meet the terms of an agreement, they can call on the letter of guarantee without any proof or corroboration. Foreign Direct Investment Insurance Export credit agencies (ECAs) as a group are very active in supporting and insuring foreign investment as a major element of international business activity. Foreign investment insurance can be secured for terms extending in some cases up to 15 years and beyond, covering a variety of situations such as war, expropriation or nationalization, and transfer risk. © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency – Case Study Going Global with an ECA Over the course of 30 years, MarineNav Inc. (MNI) has built an international reputation for its work in Integrated Marine Traffic Control systems. Based in Los Angeles, California, MNI provides highly technical solutions to clients in the United States and Canada, as well as other countries including Tanzania, Libya, Algeria, Morocco, Democratic Republic of Congo, Venezuela and Colombia. Many of the markets that MNI trades in have challenging political environments, causing contract and construction delays, deferred billing of completed work and collection of receivables. These delays have a significant impact on MNI operations, including obstructing progress of other contracts. © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency – Case Study To overcome these challenges, MNI benefitted from a variety of services offered by its ECA, including: Performance letters of guarantee: MNI contracts require the company to issue performance letters of guarantee to secure the buyers. This 100 percent ECA guarantee enabled MNI to issue the required guarantees when the contracts were signed. Political risk insurance: During the Arab Spring in Libya, MNI lost all of its assets in that country. The coverage provided through its political risk insurance allowed MNI to replace these assets right away. Working capital financing: MNI took on four contracts at once and were unable to secure adequate financing using the © 2017, 2020, 2021 FITT All Rights Reserved  Export Credit Agency – Case Study company’s line of credit. MNI received working capital financing provided by the ECA in partnership with MNI’s bank. This financing allowed MNI to complete the contracts and maintain its sterling international reputation. Direct lending: Some of MNI’s prospective clients struggle with access to financing within their countries. To resolve this challenge, the ECA will lend directly to foreign buyers or provide a guarantee to a foreign bank that would then lend the client the money needed to make the purchase. The support of an ECA was instrumental to MNI’s success, providing market intelligence and financial support that allowed the company to grow by 200 percent on the international market. © 2017, 2020, 2021 FITT All Rights Reserved  Group Discussion Discuss the possible risks which are covered by credit insurance, including what types of organizations might provide credit insurance and the various forms of risk sharing between exporter and insurer. © 2017, 2020, 2021 FITT All Rights Reserved  Group Discussion 1) Identify and explain four factors that an insurer considers to decide on the risks involved in the credit insurance policy 2) A Ugandan company has signed a contract with a Brazilian company to import footwear. It is the first time these companies are doing business together. Identify the insurance coverage the Ugandan company requires. 3) Your friend’s company has approached you to consult on an exporting contract it is trying to secure. The company is based in Australia and it wants to export cooling sunbeds to the Caribbean. Research the different Export Credit Agencies (ECAs) for the best fit for your friend’s company. Explore the coverage it would need, the types of risks and premiums that would need © 2017, 2020, 2021 FITT All Rights Reserved