“ international finance and payments ”

“International Finance and Payments”

Lecture VIII

“International Credit Market”

LecturerLecturer Cristian PĂUN Cristian PĂUN

Email: Email: [email protected]

URL: http://www.finint.ase.roURL: http://www.finint.ase.ro

Academy of Economic Studies

Faculty of International Business and Economics

Lecture 8: International Credit Market 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;


International Credit Market

International Market Dimension (2002)

Credit Market 9446 bil. USD

Bond Market 31000 bil. USD

Stock Market 3500 bil. USD

Total Credit 9.446 bil. USD Weight

Developed Countries 7302 bil. USD 77 %

Offshore Countries 1250 bil. USD 13 %

Developing Countries 894 bil. USD 9 %

A. Credit Market (general situation)



Area < 1year > 1 year

Total Credit 53,1 % 27,7 %Developed Countries 56 % 24,3 %

Offshore Countries 52 % 36,9 %Developing Countries 46,7 % 43 %

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

Area Banks Public Sector Private sector

Total Credit 46.9 % 11.9 % 38.7 %

Developed Countries 50.6 % 12.2 % 34.5 %

Offshore Countries 38.7 % 0.9 % 59.8 %

Developing Countries 30.1 % 17.1 % 52.1 %



Area EU Banks NA Jap Others

Total Credit 57.8 % 7.5 % 11.2 % 23.5 %

Developed Countries 57.5 % 6.5 % 10.7 % 25.5 %

Offshore Countries 54.9 % 8.1 % 27.2 % 9.8 %

Developing Countries 62.6 % 14.1 % 9.3 % 14 %

D. Credit Market (creditors by origin)

E. Credit Market (country distribution)

Countries Weight

US 16 %

EU 54.6 %

UK 13 %

GER 8.4 %

ITA 5.4 %

JAP 5.6 %


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.



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


Short term credits


A. Short term credits – Export Pre-financing

Producer

Exporter’s Bank

Exporter1

2

3

Government

4 - 5

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.

6


B. Credit based on B/E discount

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.

1Exporter

X Bank

Importer

3

4

Other bank

5 2

)360100

NtaxDiscount (1value NominalvalueDiscount days


C. Importer Banker’s Acceptance

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 Exporter’s bank;5 – Payment at the maturity.

Exporter

Exporter Bank

Importer1

34

Importer Bank

2 5

5


D. Exporter Banker’s Acceptance

Exporter

Exporter Bank

Importer1

34

Importer Bank

2 5

5

1 – Export contract;2 – B/E Acceptance by the Exporter Bank;3 – Presenting B/E to the Exporte’s Bank or to other local bank;4 – Discounting the B/E;5 – Payment at the maturity against B/E.


E. Credit transfer

Exporter

Financing Company

Importer

1

2

5

Importer’s Bank

3 4

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.


F. Revolving Credit Agreements

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.

Revolving Credit AgreementRevolving Credit Agreement -- A formal, legal commitment to extend credit up to some maximum amount over a stated period of time.


G. Line of credit

• - 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.

Line of creditLine 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.


Long term credits


A. Syndicated loans

Beneficiary

Group of the participant banks

Credit Management Group

Lead Manager

Credit Memorandum

Bank A Bank B

1

32

4

5


A. Syndicated loans – operations description

1. Contacting a leader bank2. Creating the coordinating group (when the amount is important),

analyzing the beneficiary, establishing the credit conditions3. Creating the group of participating banks4. 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);

5. Obtaining money from other banks.


B. Eurocredits

Beneficiary Lead Manager

2

Bank A

Bank C

Bank B

1

4

Coordinating Group

4

3

Capital transfer from local markets

5


B. Eurocredit – operations description

1. Contacting a leader bank2. Creating the coordinating group (when the amount is important),

analyzing the beneficiary, 3. Establishing the credit conditions by analyzing the beneficiary4. Contacting different banks that will provide funds trough revolving

credit arrangements to the coordinating group5. Refinancing from local capital markets by issuing stocks and bonds.


C. Seller Credit

Exporter

Export Credit Agency

Guarantee bank

Exporter Bank

Importer1

32

4

5

6


C. Seller Credit – operations description

1. Import contract of an equipment;2. Obtaining a guarantee letter against default risk for the credit;3. Obtaining the seller credit based on export contract and guarantee

letter. Delivering the goods to importer;4. Refinancing the transaction from public funds (Export Credit Agency);5. Paying back the import at the maturity6. Seller Credit reimbursement


D. Buyer Credit

Exporter

Guarantee Institution

Exporter Bank

Importer1

3

2

4

5

Export Credit Agency

Insurance Company

6


D. Buyer Credit – operations description

1. Import contract of an equipment;2. Obtaining a guarantee letter against default risk for the credit;3. Obtaining an insurance policy by importer for political risk associated

to the buyer credit4. Obtaining the buyer credit based on export contract, political risk

insurance policy and guarantee letter. Delivering the goods to importer and payment of goofs;

5. Refinancing the transaction from public funds (Export Credit Agency);6. Buyer Credit reimbursement


E. Parallel Loans

USD Credit

1

Company A Company B

Subsidiary of B

Subsidiary of A

Credit Contract

32 GBP Credit


E. Parallel loan – operations description

1. Parallel loan contract2. Granting a credit directly from A Company to B subsidiary from USA

expressed in USD3. 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


F. « Back-to-back » loans

Credit in USD

1Company A Company B

Subsidiary of B

Subsidiary of A

Credit Contract

Credit in GBP

Bank BBank A

3 4

22


F. Back to back loan – operations description

1. Back to back loan contract2. Obtaining a credit in USD for Company A and a credit in GBP for

Company B from their own local markets3. Granting a credit directly from A Company to B subsidiary from USA

expressed in USD based on initial credit4. 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)


Special Credits


G. Leasing contract

Importer

Exporter

Leasing company

Insurance Company

1

7

2

345

8

Banks

69


G. International Leasing contract – operations description

1. Signing a leasing contract for import of an equipment2. Indicating the provider of equipment3. Negotiating the contract4. Insurance policy for the equipment5. Delivering the equipment6. Refinancing from banks7. Paying the equipment8. Paying the leasing taxes9. Paying back the credits by the leasing company


Types of leasing contracts

1. Lease-back: the sale of an asset with the agreement to immediately lease it

back for an extended period of time.

2. Direct leasing: the producer directly leases the equipment to a company;

3. Leveraged Leasing: – the leasing company borrows from a lender to buy

the asset that will be leased to the beneficiary.

4. Financial Leasing: Longer-term, “fully amortized” and the lessee is

responsible for maintenance, taxes, and insurance.

5. 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.

6. Net Leasing: in the leasing contract are not included the expenses with the

maintenance of the leased equipment


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 100,000Total 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


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


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 firm’s cash

cycle.

Leasing avoids the problems of ownership.

Leasing vs. Debt Financing: Potential Benefits

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.

5) Tax SavingsLeases may provide a larger tax shield than that provided by depreciation.

6) Ease of Obtaining CreditIt is often easier for riskier firms to obtain a lease than to obtain debt financing.

Leasing vs. Debt Financing: Potential Benefits


Exporter

Factoring company

Importer

Importer’s Bank

6

3 4 52

Factoring with payment in advance (old fashion factoring)

1


1. Export contract2. Delivering the goods3. Presenting the commercial documents for payments (invoices)4. Paying in advance the presented invoices (less a commission an a

guarantee of 10%)5. Paying at the maturity6. 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

Factoring with payment in advance (old fashion factoring) – Operations descriptions


I. Factoring with a payment at the maturity

Exporter

Factoring company

Importer

Importer’s Bank

5

3 6 42

1


I. Factoring with payment at the maturity– operations description

1. Export contract2. Delivering the goods3. Presenting the commercial documents to the factor4. Paying at the maturity5. Transferring the money to the exporter (less a commission)


J. . Forfeiting

Exporter

Forfeiting Institution

Importer1

2

5

Importer’s Bank

3 4

- 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 Bank’s 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)


J. . Forfeiting – operations description

1. Export contract2. Delivering the goods3. Presenting the commercial documents to the forfeiting company4. Paying the transaction against presented documents5. Transferring the money to the forfeiting company at the maturiy

Note:The exporter will pay an interest rateThis 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)


International Credit – Final Conclusions

Exporters Importers export pre-financing; discounting the bank’s drafts; credit transfer; importer / exporter banker’s acceptance; syndicated loans; eurocredits; seller credits; “back to back” loans; parallel loans; factoring; forfeiting.

line of credits; revolving credit arrangements banker’s acceptances; syndicated loans; eurocredits; buyer credit; “back to back” loans; parallel loans; leasing;

“ international finance and payments ”

Documents

international credit

international credit

international credit

international credit

letter of credit

credit expansion

credit market creditors

international payments