THE ART OF FORFAITING

10 TFR NOVEMBER 2010

Sconto pro soluto!*You don’t need to be around for long before you become aware of how influential Italian forfaiters are in the

forfaiting market. The obvious question to ask is, why? By RICHARD WILLSHER.

These are not great days for Italian forfaiting, but the market could be on the turn. “A fair percentage of the Italian exports of capital

goods is made up of machinery and equipment, supplied by medium-sized companies to medium-sized buyers in emerging markets,” says Giancarlo Parente of Simest, the Italian government entity that provides export-credit interest support programmes.

“The average size of export contracts does not lend itself to the use of syndicated buyer credits, which are too complex to structure and to handle. The simplicity and speed of forfaiting is, therefore, particularly welcomed by Italian businesses,” he adds.

Enrico Seralvo, Managing Director of Intesa Soditic in Milan, adds that forfaiting has been in use in Italy for decades and remains as relevant as ever. He recalls a time when accessing export credit insurance cover through Italian export credit agency (ECA) SACE was much less efficient than it is today.

Moreover, in those days it was not possible to assign SACE policies without recourse. Therefore forfaiting, especially involving banks operating outside of Italy, was the most efficient way of ensuring Italian exporters could avoid the payment risks of offering medium-term credit in support of their equipment sales.

Moreover there is increasing competition from SACE. Jelmoni notes that it has become much more efficient and aggressive. It can now give approval for medium-term credit cover in the space of a week, which makes it a staunch competitor for traditional brokers of forfaiting deals.

New demandsNevertheless, Eufintrade’s Raffaele D’Alo says that he remains optimistic about the future development of forfaiting. “Based on my own experience, I have personally seen several crises in the market. Each time the question arises, ‘will forfaiting survive?’ But we are still here talking about this product and the number of participants at the IFA Annual Conference increases year after year. I do believe, however, that the market should change its approach towards corporate risk transactions, because they represent the highest percentage of the enquires that we see from Italian exporters.”

So while it looks as if the nature of the demand for forfaiting support has changed, the forfaiting technique itself remains as popular in Italy as ever. There, as in the rest of the international banking and trade finance community, the long shadow of the 2008 crisis still darkens the picture. Whether tighter credit terms will now be a fact of life as the demands of Basel III take hold, or whether forfaiters will find new ways to do business, we will have to wait and see.

But the chances are that Italian forfaiters, and transactions structured to support exports of Italian goods, will continue to be significant features of the international forfaiting market, as ever.

Richard Willsher is a financial journalist and trainer, perhaps best known for the seminars that he conducts with the IFA. He can be contacted by emailing rdw@richardwillsher.com.

For more information about the International Forfaiting Association see: www.forfaiters.org or e-mail info@forfaiters.org.

* In English: ‘discount without recourse’

Troubled times and changing termsA lot has changed since those golden days when interest rate subsidies were richer than they are today, but forfaiting remains relevant, says Parente. “Over the past decade the forfaiting scheme has supported roughly a yearly average of €2.3bn of business,” he says. Yet Italy has been through troubled times over the past couple of years, along with all of the other major economies of the western world.

The years 2008 and 2009 both witnessed declines in exports of Italian capital goods. This year has seen a modest increase, although the strength of the euro against the US dollar is not helping. Paolo Jelmoni of Treviso, Veneto-based brokers and advisors Reginato & Mercante is moderately optimistic that this will improve, as is Raffaele D’Alo of Eufintrade in Lugano, Switzerland.

“Today the market is very depressed,” says D’Alo. “However, it seems that something is moving and there is some increase in exports to China, Turkey

and elsewhere in the Far East, albeit that these transactions are supported by short-term letters of credit. And I have to say that there are a lot of requests for ‘silent confirmation’ or discount of usance letters of credit issued by Iranian banks.”

This represents a general shift away from traditional discount of promissory notes and bills of exchange in favour of deferred payment letters of credit (LCs). Many of these are simply discounted by local Italian banks and held in their books until maturity.

Paolo Jelmoni says that banks in some of the larger emerging markets have plenty of liquidity and are therefore tending to assist their importing customers with local facilities. This means that Italian exporters may simply be paid at sight, without the use of LCs or medium-term financing.

In addition, he notes that Italian exporters are increasingly requesting capacity to discount corporate names without the support of bank guarantees. This also tends to impair the liquidity of the market, as there are fewer counterparties to buy such paper. In particular, banks are increasingly constrained by tightening capital and liquidity regulation.

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“Today the market is very depressed… However, it seems that

something is moving and there is some increase in exports to

China, Turkey and elsewhere in the Far East, albeit that these

transactions are supported by short-term letters of credit.”

RAFFAELE D’ALO, EUFINTRADE