Credit Risks and Risk Mitigation Techniques

Registration Process: 8:30 AM – 9:00 AM

Session Start Time: 9:00 AM

1. The Risks of Extending Credit
1. What might go wrong
1. commercial risks (default, bankruptcy, contract repudiation, abusive drawing of bid & performance bonds, etc.)
2. political risks (coups, war, government regulations on foreign payments, etc.)
3. transfer/economic risks
4. foreign exchange rate fluctuation risks (direct and indirect risks)
2. When it might go wrong: pre-shipment vs. post-shipment impact
3. Impact of exporting on DSO, A/Rs, cash flow
2. The spectrum of credit/payment terms
1. Extended terms, installment notes
2. Open account, clean drafts
3. Time draft (D/A)
4. Consignment/retention of title
5. Sight draft (D/P, C.A.D.)
6. Cash against goods, C.O.D.
7. Advised letter of credit: sight & time
8. Confirmed letter of credit
9. Cash in advance
3. Considerations
1. Competition
2. Industry practice
3. Country practice
4. Custom-made vs. off-the-shelf products
5. Freight costs
6. Profit margin
7. Amount and frequency of shipments (high credit)
8. Cash flow
4. Risk protection mechanisms (& gaps)
1. Letter-of-credit-related techniques
1. Unconfirmed L/C
2. Confirmed L/C
3. “Silent L/C confirmation”
4. Assignment of L/C proceeds
5. Transferable L/C
6. Standby L/C
2. Guarantees (and how they differ from standby L/Cs)
1. Independent/demand guarantee
2. Accessory/contract guarantees
3. Documentary-draft-collection-related techniques
1. Sight draft, “documents against payment”
2. Avalized drafts and forfaiting
4. Protection for open account sales
1. Factoring
2. Non-recourse sale of receivables
3. Credit insurance
4. Credit derivatives
5. Protection from foreign exchange fluctuations: FX forwards & options
5. Credit Policy Matrix Exercise
6. Risk Management Case Studies
7. An Extended Look at Credit Insurance
1. What is trade credit insurance?
1. insures receivables against nonpayment by buyers
2. involves risk sharing
3. does not cover disputes
2. How credit insurance works
3. Major providers
1. private insurers
2. ECAs
4. Risks covered
1. commercial risks
1. insolvency
2. protracted default
2. country risks
1. transfer risk
2. government moratorium/exchange controls/discharge of debt
3. contract frustration
4. civil turmoil
3. risks that are not covered
1. contract disputes and contract repudiation
2. abusive bond drawings
3. currency fluctuations
4. exclusions, like war between the major powers
5. Primary characteristics
1. credit limits
2. named-buyer coverage (“European-style” coverage)
3. discretionary credit limits & deductibles (“American-style” coverage)
6. Common types of policies
1. “whole turnover”
2. key-account
3. single-buyer
7. More exotic types of policies
1. political-only
2. contract frustration
3. pre-shipment financing (“vendor financing”)
4. abusive drawing
5. tender exchange risk indemnity (“TERI”)
6. securitization (“triple-trigger” w/ liquidation shortfall)
8. Principles
1. insured must have an “insurable interest”
2. trade credit insurers may not issue financial guarantees
3. underwriters insure themselves with large re-insurers
9. Policy variables
1. cancelable or non-cancelable limits
2. “risk attaching” or “loss occurring”
3. insured percentage
4. annual deductible
5. non-qualifying loss amount
6. individual buyer limits
7. discretionary limit
8. insurer’s maximum policy liability
9. covered terms of sale
10. Credit insurance and banks
1. credit insurance enhances your own creditworthiness
2. some banks will purchase insured receivables with limited recourse
3. asset-based lenders and banks that securitize receivables require credit insurance on foreign receivables and buyers with large concentrations
4. banks do not like deductibles or the conditions that accompany discretionary limits and non-cancelable limits
5. the bank may be made the loss payee or, in some cases, a joint insured
11. Key policy points
1. insurance does not cover disputes
2. watch the reporting requirements
3. watch the claims filing deadlines
4. do not “ship into a past-due”
5. all policies have exclusions
6. the policy may contain specific limitations
7. pay the premium on time

8. An Extended Look at Commercial Letters of Credit
1. Structure and flow
1. 3 parties: applicant, beneficiary, issuing bank
2. 3 contracts: contract of sale, L/C application, L/C
2. Principles
1. independent
2. documentary
3. Risk mitigation
1. commercial risks: bankruptcy, slow payment, contract repudiation, contract dispute
2. documentation risk remains
9. Confirmed Letters of Credit
1. Adding a 4th party to the structure
1. Rights of a confirming bank
2. Confirming bank must be authorized to confirm
2. Additional risk mitigation
1. Political risks
2. Transfer risks
3. FX risks (direct & indirect)
4. Documentation risk still remains
3. Problems with confirming banks
1. The confirming bank is chosen by the issuing bank
2. The confirming bank has a monopoly position (a/k/a a license to steal)
3. The confirming bank may be an affiliate of the issuing bank
4. The confirming bank can be enjoined from making payment
10. International Letters of Credit
1. Adding an advising bank
1. Role of the advising bank
2. Responsibilities of the advising bank
2. Adding a nominated bank
3. How letters of credit are available
4. Rights of a negotiating bank
1. L/C must call for drafts
2. L/C must be available by negotiation
3. L/C must be available with negotiating bank
5. Negotiation with recourse
1. Only available from a relationship bank
2. Similar to depositing a check with recourse
3. Speed up cash flow
4. Centralize international banking needs with one bank
6. The value of receiving “freely available” letters of credit
7. Discrepancy identification and resolution
8. Adding a reimbursing bank
11. Dissecting a Typical L/C in the SWIFT Format
12. Managing Your Export Letters of Credit
1. Benefits of centralizing collection of letter of credit payments
1. Fees based on volume
2. One-stop information
3. Consistency
4. Responsiveness, communication, service
5. Expedited funds availability
6. shipper's indemnities
2. How to centralize
1. Stop asking for confirmed L/Cs
2. Stop asking for L/Cs to come through a particular bank
3. Start asking for freely available L/Cs
3. Replacing confirmation
1. Reasons for having L/Cs confirmed
2. How confirming banks get chosen
3. What the exporter wants vs. what the exporter often gets (i.e. “the shaft”)
4. Advantages (and disadvantages) of “silent confirmation”
5. “Elective confirmation”
4. Using a document preparation service
13. Usance Letters of Credit
1. L/Cs with time drafts vs. deferred payment L/Cs
2. Significance of whom drafts are drawn on
1. Obligations of the drawee
2. Fixing maturity
3. Discounting accepted drafts
4. L/C re-financing vs. time drafts
5. Effect of “discount charges for buyer” clause
14. Rules and Regulations to Be Aware Of
1. The Uniform Customs & Practice for Documentary Credits (“UCP”)
2. The Uniform Commercial Code, Article 5
3. International Standard Banking Practice for the Examination of Documents under Documentary Credits (“ISBP”)
4. The “eUCP” (rules for electronic presentation of documents)
5. The International Standby Practices (“ISP98”)
6. The Uniform Rules for Demand Guarantees
7. The International Commercial Terms (“Incoterms”)
8. Antiboycott regulations
9. Office of Foreign Assets Control (“OFAC”) sanctions
10. The USA PATRIOT Act and Anti-Money Laundering regulations
15. UCP Game (“Last Man Standing”)
16. A Look at the UCP600
1. What the UCP is
2. Major changes from the UCP500
3. Selected articles
17. Examining L/C Documents (Common Discrepancies)
18. Quoting an L/C Sale (an L/C Instructions Form)
19. An Extended Look at Standbys
1. Using standbys in trade transactions
1. credit line back-up (instead of commercial L/Cs)
2. bid bonds (seller is applicant)
3. performance bonds (seller is applicant)
4. advance payment bonds (seller is applicant)
2. Using standbys to arrange local guarantees in other countries
3. ISP vs. UCP
4. Standby loopholes
1. court injunctions
2. bankruptcy
1. of the issuing bank
2. of the applicant (preferential payments)
3. abusive drawings
5. Tips, tricks, & facts regarding standbys

Walter (Buddy) Baker brings more than 30 years of experience in international trade finance to his current position as Vice President and head of Global Trade Solutions Delivery for Fifth Third Bank. Fifth Third is one of the 20 largest banks in the US and provides a full range of risk mitigation and financing products for exporters and importers. Mr. Baker’s professional experience includes earlier stints with Atradius Trade Credit Insurance, ABN AMRO Bank, Bank of America, Wachovia Bank, and The First National Bank of Chicago.

Mr. Baker is a recognized expert in trade finance and author of numerous magazine articles and the books Users’ Handbook to Documentary Credits under UCP600, Documentary Payments & Short-Term Trade Finance, and The Regulatory Environment of Letters of Credit and Trade Finance. He owns the consulting firm Global Trade Risk Management Strategies, which specializes in educational training, and makes frequent presentations for national associations of exporters, importers, bankers, and lawyers. As a member of the National Letter of Credit Committee of the International Financial Services Association, the Advisory Council of the Institute for International Banking Law and Practice, and the Council for International Standby Practices, Mr. Baker is actively involved in establishing national and worldwide standard practices for LCs.

He participated in the most recent revision of the Uniform Customs and Practice for Documentary Credits (referred to as “UCP600”), contributed to the creation of the official ICC guide for examining letter of credit documents, called the International Standard Banking Practices for the Examination of Documents under Documentary Credits, and served on the drafting committees for the International Standby Practices (“ISP98”) and Article 5 of the Uniform Commercial Code. He is also on the Board of Directors of the Association of International Credit and Trade Finance Professionals (“ICTF”), a multinational association of export credit managers.