International Trade Risk Management

Practical Solutions for the Trade Creditor

Raul DavilaSenior Manager, International Credit

RAVAGO S.A.

RAVAGO S.A.

• The Ravago group represents over 3,400,000 metric tons of

annual polymer sales serving 40,000 active customers

through 200 offices across more than 50 countries worldwide

with more than 4,500 employees.

• Ravago’s production competence consists of

23 manufacturing facilities of which 18 recycling and

compounding plants in North America, Europe and Turkey.

• Ravago has more than 200 subsidiaries located in over 50

countries: each one of the entities pursues sustainable

growth. Our continuous ambition is to capture rising

opportunities on a global scale. From Belgium to the USA and

from Dubai to Hong Kong we supply products to customers

worldwide.

RAVAGO: Product Offering, Markets and Applications

Polyethylene (PE)

Polypropylene (PP)

Engineered Thermoplastics

(ETP)

Polystyrene (PS) and Acrylonitrile

Butadiene Styrene (ABS)

Polyethylene Terephthalate

(PET)Rubber

% of Sales 32.2% 20.9% 7.7% 7.6% 4.7% 2.0%

Key Suppliers

• ExxonMobil • Dow Chemical • LyondellBasell • Formosa

• P innacle P olymers • ExxonMobil • Braskem • Formosa

• Ravago Manufacturing Americas • BASF

• American Styrenics • Total P etrochemical • Styrolution • Sabic

• DAK Americas • Alphabet Inc. • J iangyn Xingyu • Auriga P olymer

• ExxonMobil • Dow Chemical

Key Markets

• P ackaging • Films • Molding • P ipe • Conduit

• Extrusion molding • Injection molding

• Automotive • Electrical • Electronics • Medical • Lawn and garden

• Molding • Extrusion • Expandable beads

• Food distribution • Household packaging

• Sporting goods • Automotive • Houshold

Key Applications

• P lastic wrap • P lastic bags • Squeeze bottles • Housewares • Toys • P lastic tanks • P ails • P ipes

• Disposable service ware • Trays • Hangers • Appliance parts • Business machines

• Manifolds • Wheel covers • Trims • Irrigation systems • Connectors • J unction boxes • Medical instruments

• Disposable service ware • Trays • Hangers • Appliance parts • Business machines

• Food/Consumer packaging • Thermoformed cups • P lastic strapping

• Golf balls • Tires • Tubes • Toys • Molded goods • Footwear

Note: Other Products (24.9%) include additives, ASA, scrap polymers, and other polymers not grouped for this slide

Raul Davila

Education• Bachelor’s of Science degree in Economics from Catholic University in Quito

• Finance degree from Monterrey Institute of Technology ITESM in Mexico

Employment History 20 years of experience in Credit, Banking and International Trade

• Ravago: Credit Risk Manager for Latin America

• Bamberger Polymers: Credit Risk Manager of International Sales

• IIG Investment Fund: International financial products

• Muehlstein: Credit Manager for Latin America

• Banco del Pichincha in Ecuador: Corporate Relationship Manager and Project

• Past-Chair for the International division of the National Credit Chemical

Association. Currently a Board Member.

• Recently joined the Advisory Board of ICTF.

TRADE RISK MANAGEMENT

FinancialWorking Capital

ABL

Assets RiskA/R Risk

Trade RiskInsurance

Commercial Sales growthProfitability

COMPROMISE

TEAM WORK

WHEELING AND DEALING!

RISK AND COST

OPEN TERMSDRAFTS

PAGARES

PERSONAL GUARANTEECOMFORT LETTER

LOCAL BGOFF TAKERSEXIMBANK

CIACAD

CIA/CADSTANDBY

Avalized Draft

ForfaitingL/C

HIGH RISK

LOW RISK

DifficultSimple

CREDIT INSURANCE

Cash in Advance / Prepaid in Full

• 100% of the value of the invoice is wired in

advance

• Goods are shipped

• Always “Know Your Customer” (KYC)

• Documents are sent directly to customer

• Venezuela Gov. does not accept this kind of

transaction

• Argentina accepts it, but obtaining the import

license is a nightmare

• Low risk and easy

Cash Against Document

• Payment against proof of shipment. “B/L”, invoice, certificates.

• In reality, it is Cash against Document at Arrival

• Consignee of Documents:

• “To the Order” Low Risk

• “To the Bank” Low Risk

• “To the Subsidiary” Low Risk

• “To the Customer” High Risk

• Documents comply with the regulation of the country. For

example, Argentina.

• Credit Department must check and set limits to these types of

transactions “KYC”.

• Documentation should be handled by foreign banks, subsidiaries or

trustful agents.

Cash Against Documents – 2 -

• What happens if we don’t receive payment?

• RE-EXPORT? In Brazil, products can be at the port for 60

days. After that, the product has to be moved to a bond

warehouse for up to six months. Filing the paperwork for

re-export takes 45 days. The product could be seized by

Customs and the entire cargo could be lost. Each country

has its own laws, regulations and cost about re-export.

• SELL TO ANOTHER CUSTOMER? Some countries don’t

allow it if the country requests an Import License.

Combination: 20%CIA 80%CAD

• Customers must have skin in the game. Is 20% enough?

• In commodities Prices fluctuate. Customers can back out of

the deal at any point. For example, you’ve shipped the

product. Two months later, product arrives at the port and the

price has dropped more than 20%.

• Credit Review. Is this customer paying taxes?

• Who has the Documents? Who is the consignee?

• Argentinean Banks don’t accept to be consignees

• In Brazil, banks don’t accept to be consignees if you ship

to tax-free agreement zones

• Every country needs to be checked

• In these cases, Documents should be sent to your

subsidiaries or trustworthy agents.

• Usually not covered by Credit Insurance

Open Term Invoice

• Credit department reviews and approves Credit

Lines and orders

• Risk of the customer

• Can be Credit Insured

• Documents consigned to customers, could be

consigned to the order, bank or branches.

• Keep “Term” on line with your goal of DSO but

competitive with the market and cash flow of

customer.

• Invoices are subject of Finance and Credit

Insurance

Open Term Invoice -2-

• Trade Risk vs. Country Risk

• Do customers in risky countries pay well?

• Customers keep the international suppliers

• Colombia, Ecuador and Chile

• No payment• Demand payment with Invoices in court

• Ordinary action takes 3-4 years (up to 6) to have a court

final decision.

• You have to prove in court the delivery of the goods and

the debt validity.

Open Term w/Draft/Promissory Note

• Promissory Note (Pagare) has executive way.

• Improve our comfort level.

• IT IS NOT A GUARANTEE.

• Default payment

• Demand in court with an Executive action

• Court processes take 2-3 years. It doesn’t mean we will

collect.

• Pagares are different for each country and have

to conform with Civil code and commercial

practices in each country.

• Complicated to implement and not cheap.

• Very low rate of success on collection in LA

Terms with Fianza Solidaria

• Almost the same as Pagare

• Guarantor is a third party

• Usually owner or sister company

• Owner or sister Company is located in another

country

• It is better to have the Pagare with Aval of

owners

Comfort letter

• Improve our comfort level for a Subsidiary of a

Rated Related Company.

• If they don’t pay, we pay.

• Corporate Pressure to Pay.

• Lawyer has to review documents, according to

the law of the country of the guarantor.

• Check the conditions of acceleration of payment.

• How long is it valid and if shipments are going to

be covered before the expiration of CL.

• It doesn’t have legal rights. It is an Intention.

• Legally, it is weaker than the Pagare.

Local Bank Guarantee

• Shift the risk from customer to a local bank.

• Subject to local financial laws.

• Who executed??

• Who presents to the local bank? A person legally

authorized?

• Some legislations allow foreign companies to be

the beneficiary, others don’t.

• Evaluate the risk of the issuing bank.

• Set of conditions very simple.

• Can be used for some forfaiting transactions.

• Costs can be high but is paid by customer.

Standby L/C

• Risk shifts from customer to issuing bank if

advised or confirming bank.

• Risk transfers to Banks and UCP Rules.

• Set the conditions, the simpler the better.

• Operational risk, establish a way to control

shipments, terms against expiration of the L/C.

• Cost is negotiated between Customer and

Beneficiary.

• Easier than a regular Letter of Credit.

Off taker agreements/3rd party Inv.

• To secure payment from the customers of our

customers to shift some of the risk.

• Customer doesn’t qualify for open credit or

impossibility of Letter of Credit.

• Customer’s customer has to agree with the

“cession” “transfer” of invoices.

• Performing Risk, customer has a contract to

supply inputs, but issues of quality and rejects

can be a problem.

• Really difficult to implement and control.

Avalized Draft

• Shift risk from customer to a local Bank, when a

local Bank guarantees the customer.

• No credit Insurance needed.

• Customer has to have a Credit Line available

with a Bank.

• Bank has to accept the Draft, add AVAL to the

draft. Like an acceptance.

• Negotiate the Aval and immediately get cash.

• The Aval discounts are subject to local rates in

US dollars.

• Very common in North Africa and Middle East

Forfaiting

• Faster collection and Longer Terms.

• Covers risk: Forfaiting is discount without recourse and

covers country risk (political and transfer risk),

currency risk, and interest rate risk. More than

factoring that covers only commercial risk

• Discount cost and fees can be included in the sale.

• After the first transaction, speed process increases and

becomes more simple.

• Documentation should be simple and straight forward.

Copy of invoice and shipping documents and

negotiable instrument are signed by debtor. Also,

confirmation from debtor bank that signatures in

negotiable instrument are authentic and valid.

Forfaiting

• Disadvantages:

• Discount rate is normally competitive but

commitment fee and flat fee increase the cost

considerably. Also, consider documentary

collection fees.

• Process: first transactions are long. Debtor needs

to be qualified, then you need to negotiate costs

and finally documentation needs to be sent thru

a bank.

• Only works for higher amounts and terms higher

than 150 days.

Letter of Credit

• Shift risk from customer to the issuing or

confirming bank at transactional level.

• No credit Insurance needed. (When calculating

the sales for credit insurance take this out)

• Discount Rates can be very attractive. Banks

have better rates than companies.

• Be aware of foreign banks’ branches confirming

in the US. Usually higher discount rates.

• Check with your bank if risk is acceptable when

only advising. If the issuing bank is on “the list”.

• Be aware of adv. Bank, who is processing Docs.

• Labor intensive, lots of detail.

ExIm bank

• For Export of US products only

• For Export to countries approved by Exim bank

• Customers will benefit from longer terms, 180 days

• Exporter receives information that the customer has a credit

line facility of Exim bank Line by a Commercial Bank, sells the

products and presents documents for payment.

• All documents are reviewed by a third party bank

• Documents can be rejected by the bank for no availability.

Exporter didn’t know. And now?

• Documents are sent to the Customer and then presented to

the bank?

• My customers with Exim bank perform poorly.

Credit Insurance

• Excellent tool to support Credit Management and

Sales Growth.

• Shift the risk to a “Risk Enabler”.

• Single Named buyer vs Catastrophic.

• Global Policy vs Country Base vs Customer Base.

• Facilitator of Trade Finance, ABL and A/R

financing.

• Banks request Credit Insurance programs that

secure export receivables.

• Factoring, Forfaiting programs are Credit

Insurance supported.

Credit Insurance–Single Buyer Limit

• Insurance approves credit limits for each customer

above DCL.

• Insurance becomes your credit department.

• Credit Department has lots of paperwork and filing

requirements. Administratively intense.

• How many customers, few hundred vs. few thousands.

• Low deductible but higher premiums and cost

• Disadvantage: What is your market share or unique

market knowledge and core competency.

• But if you don’t have a market share or market

knowledge, it is a great tool.

• Depends on how strong your credit department is

Credit Insurance - Catastrophic

• Provides lots of freedom for decision making,

based on your credit Policies, financial ratios,

payment history, written credit references.

• Need a Credit Department with strong

knowledge of customers and markets.

• Less intensive paperwork and fewer reports

• High deductible and low premiums

• You keep most of your market info in house

• Disadvantage: High deductibles, not good for

market penetration, or countries with poor

knowledge and presence.

Credit Insurance

• GLOBAL POLICY vs. COUNTRY

• Legal Issues of the insurer in different countries

• Claims in different countries could be very complicated to

pay.

• How to pays taxes, VAT in different countries

• Local policies with global deductibles or local deductibles

• You can insure one country that you target for commercial or

risk reasons

• Appetite for country risk: Argentina?

• Credit Insurance Syndication

• So what are the options?

The option is: Don’t sell, which

means there is no need for credit

managers, there is no job for me.