Growing Globally: Nicole Weidlein. An International Trade Finance Boot Camp for Exporters. Wells Fargo International Group.

Transcription

1 Growing Globally: An International Trade Finance Boot Camp for Exporters Daniel Duffy JP Morgan Chase Lynne Gruel KeyBank Nicole Weidlein Wells Fargo International Group

2 Agenda Introduction of Speakers Daniel Duffy, Vice President, J.P. Morgan, Global Trade and Loan Products Lynne K. Gruel, Senior Vice President, KeyBank, N.A., Technical Trade Advisor, Enterprise Commercial Payments Nicole Weidlein, Wells Fargo Bank, N.A. Comparison of Payment Options Assessment of Risks and Compliance Issues Overview of Documentary Collections and Letters of Credit Overview of Foreign Exchange 1

3 International Payment Mechanisms When selling your merchandise, how quickly would you like to be paid? 2

4 International Payment Methods Cash in Advance Open Account Documentary Collection Letter of Credit 3

5 International Payment Methods Assessing What s Right For You How much risk is your company willing to take? How well do you know your customer? What payment terms are typical for your industry? What is your competition offering? What is the nature of the order? What is the political and economic situation in the Buyer s country? 4

6 Sales Contract Provisions Merchandise Description Be Specific Packing and Marking Requirements Delivery Instructions Time and place Price Itemize goods and seller-supplied non-product services Shipping Terms Incoterms 2000 Transfer of Ownership Insurance 5

7 Sales Contract Provisions Inspection By whom and at what cost Warranties Type and duration Applicable Law CISG or other Dispute Resolution Procedures Method of Payment CIA, L/C, DC, OA Exporter is undertaking the foreign currency risk 6

8 International Payment Methods Most Commonly Used Methods Most Protection CASH IN ADVANCE LETTER OF CREDIT DOCUMENTARY COLLECTION OPEN ACCOUNT Least Protection 7

9 Cash in Advance Pays BUYER SELLER Documents Goods Goods BUYER orders and pays for goods before shipment is made SELLER begins to manufacture or ships goods upon receipt of funds 8

10 International Payment Methods Cash in Advance Characteristics BUYER and SELLER typically know each other very well, and/or shipment and the cost of goods is small BUYER is not protected and may not be willing to pay up front A SELLER s preference 9

11 Open Account Goods BUYER SELLER Documents SELLER ships goods and sends documents (Invoice and Bill of Lading) to BUYER BUYER pays for goods upon their receipt 10

12 International Payment Methods Open Account Characteristics SELLER knows BUYER well and has little concern about BUYER s ability to pay Typically, these are periodic shipments of the same goods and often the same quantity Least secure method for SELLER 11

13 Risks Political unexpected changes (country or regional i.e. war) Economic economic change in specific countries, regions, or inter-regional Commercial Buyer credit acceptability Information difficult to obtain Different financial standards Cultural/Business Standard Differences Language (Negotiation/Interpretation) 12

14 Risks Foreign Exchange currency rate fluctuations Money Transfer Risk Availability of US Dollars Currency Restrictions/Licenses Time and Distance Shipping Hazards (insurance coverage) Freight Costs Customs (quotas, customs delays) 13

15 Compliance Government Regulations Special Import or Export licenses Office of Foreign Asset Control (OFAC) Bureau of Industry & Security (BIS) Office of Antiboycott Compliance Anti-Money Laundering 14

16 Collection Documents and Goods BUYER BUYER s Bank SELLER s Bank SELLER Documents Documents Documents 5 Port Goods 1 SELLER makes shipment (1) and sends shipping documents to its Bank (2), who sends them on to BUYER s Bank (3) BUYER s Bank advises BUYER that documents have arrived (4) and will be released against whatever payment terms are in the Collection Letter (5) 15

17 Collection Documents Against Payment/Acceptance Documents BUYER BUYER s Bank SELLER s Bank Documents Goods Port SELLER BUYER makes payment or accepts draft and BUYER s Bank releases the documents to BUYER BUYER takes documents to port/airport and picks up goods BUYER s Bank pays SELLER s Bank or advises of acceptance. SELLER s Bank pays SELLER or advises of acceptance 16

18 International Payment Methods Collection Characteristics Collections are a method that may allow a SELLER to ensure that shipping documents are exchanged for payment or acceptance. They may also help monitor receivables Sight (D/P) or Usance (D/A) terms may be used in Collections The full amount of a collection must be paid, unless the Collecting (BUYER s) Bank receives authority from the Remitting (SELLER s) Bank to accept partial payment Collections are subject to the International Chamber of Commerce Rules for Documentary Collections While banks control the flow of documents, they do not verify or examine the documents, nor do they take any risks of non-payment or refusal of the documents 17

19 International Payment Methods Collection Characteristics The SELLER s Bank (Remitting Bank) will collect proceeds from the Collecting Bank (BUYER s Bank) according to the instructions of the SELLER The BUYER s Bank (Collecting Bank) is responsible for carrying out the instructions described in the collection letter sent from the Remitting Bank, in order to collect the proceeds from the BUYER Banks act as agents only and are not responsible for the payment/non-payment of the collection, at sight or at maturity of an accepted draft 18

20 International Payment Methods Collection Characteristics Types of documents called for: Air Waybills vs. Negotiable Bills of Lading Consignment Documents Against Payment vs. Documents Against Acceptance 19

21 Documentary Collections Risks Buyer unable/unwilling to honor demand Renegotiate terms reduced amount extended terms Merchandise: Perishable/Special Order Options: store/insure find another buyer salvage re-ship 20

22 Letters of Credit BUYER s Bank Letter of Credit Advising Bank Advice Letter Letter of Credit Application Documents BUYER Goods SELLER A Letter of Credit replaces risk of BUYER with risk of Issuing Bank It assures the SELLER that he will be paid provided that documents presented comply with its terms and conditions A Confirmed Letter of Credit is the undertaking of two Banks; the Issuing Bank and the Confirming Bank. Both are equally liable to pay the beneficiary 21

23 International Payment Methods Letter of Credit (LC) Characteristics Offers the most protection to the SELLER Three independent agreements underline letters of credit between BUYER and SELLER (their sales contract) between Applicant and Issuing Bank (application and reimbursement agreement) between Issuing Bank and Beneficiary (the LC) Banks deal in documents only. BUYER s recourse for problems with goods is to the contract with the SELLER Documents presented under an LC must comply with its terms and conditions, otherwise there is no obligation to honor 22

24 Payment Terms Sight Payment effected when documents are presented which are in compliance with the terms and conditions of the credit Payment may or may not occur immediately if payable in the US if payable in a foreign country LC terms may contain special provisions about timing 23

25 Timeline for Sight Letter of Credit Timeline for Sight Letter of Credit Seller Buyer/Issuing Bank Advising/ Presenting Bank Reimb. Bank Contract LC Issuance LC Advising Mfg of Goods Prepare Documents Examination Reimbursement Days???????? Payment 1. Buyer/Seller Negotiate Contract and LC Terms 2. Buyer applies for LC; issued by buyer's bank 3. US bank receives LC, processes, and transmits to seller 4. Seller produces or secures goods; arranges shipment 5. Seller presents LC documents to the bank 6. Bank examines documents 7. Bank claims reimbursement; reimbursing bank remits funds 8. Funds are paid to exporter 24

26 Payment Terms Time Bankers Acceptances Provides short term financing up to 6 months tenor Defined in LC Requires draft drawn on a bank Can be xxx days from B/L date or other event Can be xxx 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 25

27 Payment Terms Time Deferred Payment Like an acceptance, but there is no draft Some countries have a draft tax Commitment to pay on a specified date Not a negotiable instrument 26

28 Foreign Buyer Instruction Letter 1. Irrevocable 2. Expiry Date & Location 3. Issuing Bank and Advising Bank 4. Importer/Exporter 5. Value and Currency 6. Payment Terms 7. Description of Goods or Services 8. Required Documents 9. Incoterms 10. Port of Loading and Discharge 11. UCP L/C Fees - Who Pays? 13. Latest Ship Date 14. Presentation Date 15. Partial Shipments (Y/N) 16. Transshipments (Y/N) 17. Paying Bank 18. Drawee Bank 19. Reimbursing Bank 20. Confirming Bank 27

29 How to Evaluate a Letter of Credit 1. Parties 2. Proceeds 3. Products 4. Progress Plan 5. Paper 6. Fine Print 28

30 What is currency risk? Participation in the international marketplace exposes companies to financial risks, including foreign currency risk. Foreign currency risk is the exposure to gains or losses resulting from the fluctuation of the exchange rate between two or more currencies. Example: 400,000 in EUR receivables due monthly between July and December, totaling EUR 2.4mm, using a benchmark of As the EUR appreciates, the USD value of the receivables increases. As the EUR depreciates, the USD value of the receivables decreases. Since no transaction has been booked to offset this risk, the company will not know the USD value of its receivables until the y are received and converted to USD. Key Take Away: Unmanaged positions create the risk of loss or gain, thus uncertainty to such things as earnings, expenses, and investment values. 29

31 Is there currency risk if I price in USD? For US firms that sell overseas in USD because of a belief that USD-pricing insulates them from foreign currency risk, market developments over the past year have strongly contradicted this view. As the beginning of 2015, depreciation of the EUR versus the USD over the previous 6-month period had boosted the EUR price of USD-priced items by about 20%; by comparison, during the same period the EUR prices of items with fixed JPY- and CAD-prices increased only 2%, and items with fixed MXN- and CNY-prices fell 1% and 13%, respectively. 30

32 USD pricing and currency risk How a strengthening USD could affect exporters As a result of increases in the relative prices of their products and diminished international competitiveness, US firms pricing overseas in USD may be : Experiencing declining sales volumes Losing market share to foreign competitors Accumulating unanticipated inventories Facing pressures to trim their USD prices Approached by customers for discounts and longer terms for purchases on credit As an alternative, firms may find planning and risk management enhanced by pricing overseas sales in foreign currency and managing the resulting direct foreign currency exposures 31

33 How concerned should my company be about currency risk? Nature of your firm s product or service Are your margins sufficient to absorb a currency shock? How frequently can you change your prices? Can you pass on increased costs to your customers in the form of higher prices? Competitive Position Is your firm a price-taker or a price-maker? What is the functional currency of your competitors? In what currencies do your competitors sell their products or services? Impact on Earnings/ Balance Sheet What percentage (%) of movement in exchange rates have a meaningful impact on your reported earnings? 32

34 Why manage currency risk? Risk management allows a company to: Reduce or eliminate volatility (to earnings, interest expense, cash flow, investment values). Maximize and improve predictability of revenue/expenses. Focus on its core business. Provide a source of competitive advantage (or reduce the disadvantages from local competition). 33

35 Identifying the appropriate hedge for your risk In addition to the underlying exposure, a company s risk tolerance and corporate philosophy toward managing risk will also help the company determine its most cost-effective and appropriate strategy. 34

36 Spectrum of hedging strategies 35

37 Summary of widely used hedge alternatives 36

38 Forward 37

39 Purchased Option 38

40 Collar 39

41 Participating Forward 40

42 Evolution of hedging 41

43 Establishing a risk management program 42

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