Business Credit Risk Management
Content
Business Credit Risk Management - Presentation Transcript
1. 2. 3. A Comparison of Techniques for Mitigating Credit Risks CMA Webinar November 30, 2006 Buddy Baker, Atradius Trade Credit Insurance buddy.baker@ atradius .com Identifying Export Risks Identifying Risks in Cross-Border Sales o What might go wrong o Commercial risks o Political risks o Transfer/economic risks o Foreign exchange rate fluctuation risks Identifying Risks in Cross-Border Sales Slow payment/default Bankruptcy Contract repudiation Commercial risk Contract dispute Abusive bond drawing Financing risk Contract risk Identifying Risks in Cross-Border Sales Slow payment/default Bankruptcy Contract repudiation Contract dispute Abusive bond drawing Financing risk Contract risk Commercial risk Foreign exchange control legislation Discharge of debt legislation Government repudiation of debt Payment moratorium Insurrection/overthrow/domestic turmoil Non-payment due to war Non-payment due to natural disasters Country risk Political risk Currency inconvertibility Transfer/economic risk Identifying Risks in Cross-Border Sales Slow payment/default Bankruptcy Contract repudiation Contract dispute Abusive bond drawing Financing risk Contract risk Commercial risk Foreign exchange control legislation Discharge of debt legislation Government repudiation of debt Payment moratorium Insurrection/overthrow/domestic turmoil Non-payment due to war Non-payment due to natural disasters Country risk Political risk Currency fluctuation/devaluation FX risk Currency inconvertibility Transfer/economic risk Identifying Risks in Cross-Border Sales o What might go wrong o Commercial risks o Political risks o Transfer/economic risks o Foreign exchange rate fluctuation risks Depending on the goods, it may make a big difference whether things go wrong before or after shipment 8. Choosing Credit/Payment Terms The spectrum of credit/payment terms Extended terms, installment notes Open account, clean drafts Time draft (D/A) Consignment/retention of title Sight draft (D/P, C.A.D.) Cash against goods, C.O.D. Advised letter of credit: sight & time Confirmed letter of credit Cash in advance 9. Choosing Credit/Payment Terms o The spectrum of credit/payment terms o Extended terms, installment notes o Open account, clean drafts o Time draft (D/A) o Consignment/retention of title o Sight draft (D/P, C.A.D.) o Cash against goods, C.O.D. o Advised letter of credit: sight & time o Confirmed letter of credit o Cash in advance 10. Risk Mitigation Techniques 11. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µ Silent L/C confirmation¶ o Standby L/C
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Independent/demand guarantee Accessory/contract guarantee, surety bond Sight draft, µdocuments against payment¶ Avalized draft & forfaiting Factoring Non-recourse sale of receivables Credit insurance Credit derivatives Forwards & futures Options
Guarantees Documentary-Draft-Collection-related techniques Open-Account-related techniques FX contracts 12. Risk Mitigation Techniques 13. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C 14. How Letters of Credit Work: Theory Buyer Seller Contract Buyer¶s Bank Letter of Credit Application 15. How Letters of Credit Work: Theory Buyer Seller Contract Buyer¶s Bank Letter of Credit Application Letter of Credit 16. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Letter of Credit 3 parties 3 independent contracts 17. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Letter of Credit Principles of Letters of Credit: Independent and Documentary Goods Documents 18. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Letter of Credit Goods Payment 19. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Letter of Credit Goods Documents Payment Debit 20. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Documents Payment Debit Letter of Credit Goods 21. How Letters of Credit Work: Reality Foreign Buyer Buyer¶s Bank Advising Bank Seller¶s Bank Seller Negotiating Bank Freight Forwarder Reimbursing Bank Contract L/C Appli-cation Docu-ments L/C L/C L/C L/C & Documents Documents Payment Payment Reimbursement Authorization Reimbursement Goods Goods Reimbursement Claim Debit 22. Risk Mitigation Techniques 7. A receivable in a foreign currency made be sold, including the remaining currency fluctuation risk. 8. FX exposure depends on the currency of the credit. 23. Risk Mitigation Techniques 1. It may be possible for the applicant to obtain a court injunction to stop payment of a non-negotiable L/C. 24. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C 25. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C 26. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Documents Debit Letter of Credit Goods Payment 27. How Confirmed Letters of Credit Work Buyer Seller Docu-ments Pay- ment Goods Contract Confirming Bank L/C L/C Debit Documents Payment Buyer¶s Bank L/C Appli-cation Docu-ments 28. Risk Mitigation Techniques 29. Problems with Confirming Banks o The Confirming Bank is chosen by the Issuing Bank o The Confirming Bank has a monopoly position o The Confirming Bank may be an affiliate of the Issuing Bank o The Confirming Bank can be enjoined from making payment # 30. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C 31. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ 32. How Commercial Letters of Credit Work Seller Buyer Negotiating Bank Docu-ments Goods Contract Debit Documents Payment Pay- ment Buyer¶s Bank L/C Appli-cation L/C Advising Bank L/C Docu-ments
33. Risk Mitigation Techniques 34. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ 35. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Standby L/C 36. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Assignment of proceeds 37. Assignments of Proceeds o Security interest in a contingent asset o Not top of the priority list (U.S. law): 1. transferred L/Cs 2. holders-in-due-course (cut off by endorsing the L/C) 3. third-party payees(?) 4. set-off rights of Negotiating Bank/Issuing Bank 5. prior perfected assignees of proceeds with ³control´ 6. holder of a perfected assignment of proceeds with ³control´ 7. holders of general, perfected security interests 8. general creditors 38. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Assignment of proceeds 39. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Assignment of proceeds o Transferable L/C 40. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Assignment of proceeds o Transferable L/C o Standby L/C 41. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Documents Payment Debit Letter of Credit Goods 42. How Standby Letters of Credit Work Applicant Applicant¶s Bank Beneficiary Contract Letter of Credit Application Letter of Credit Payment 43. How Standby Letters of Credit Work Applicant Applicant¶s Bank Beneficiary Contract Letter of Credit Application Letter of Credit Documents Documents Payment Debit 44. Risk Mitigation Techniques 2. Preferential payment risk exists unless the standby is properly worded. 3. Country risks are covered if the L/C is confirmed by a ³developed-world´ bank. [7. A receivable in a foreign currency made be sold, including the remaining currency fluctuation risk.] 45. Risk Mitigation Techniques o Guarantees o Independent/demand guarantee o Accessory/contract guarantee, surety bond
46. Standby L/Cs vs. Guarantees & Bonds Standby L/C Demand Guarantee Accessory/Contract Guarantee, Surety Bond Independent & payable against documents Independent & payable against documents Specified amount Specified amount Payable upon occurrence of specified event Amount of damages (usually with a maximum) Specified expiry Usually has a specified expiry Expiry event Rules: UCP or ISP (and UCC5 in the U.S.) Rules: URDG, ISP, or local law Rules: Local law 47. Risk Mitigation Techniques 4. Country risks are covered if the guarantee is a µlocal guarantee¶. 5. If the principal repudiates the contract, the guarantor may do the same. Be sure you know which kind of guarantee you¶re dealing with 48. Risk Mitigation Techniques o Documentary-Draft-Collection-related techniques o Sight draft, µdocuments against payment¶ 49. How Documentary Collections Work: Sight Drafts Buyer Seller Contract 50. How Documentary Collections Work: Sight Drafts Buyer Seller Contract Goods 51. How Documentary Collections Work: Sight Drafts Buyer Seller Contract Buyer¶s Bank Documents Goods 52. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Goods 53. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Documents Goods 54. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Documents Payment Goods 55. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Documents Payment Goods 56. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Goods Documents Documents Payment Payment 57. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Goods Payment Documents Documents Payment 58. Risk Mitigation Techniques o Documentary-Draft-Collection-related techniques o Sight draft, µdocuments against payment¶ 59. Risk Mitigation Techniques o Documentary-Draft-Collection-related techniques o Sight draft, µdocuments against payment¶ o Avalized draft & forfaiting 60. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Goods Payment Documents Documents Payment 61. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Goods 62. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Accepted Draft Goods 63. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Goods Accepted Draft Documents 64. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Goods Accepted Draft Documents 65. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Goods Documents Accepted Draft Documents 66. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Goods Accepted Draft Documents Payment 67. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Goods Accepted Draft Documents Accepted Draft 68. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Accepted Draft Goods Payment Accepted Draft Documents 69. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Payment Documents Payment Accepted Draft Goods Accepted Draft Documents 70. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Accepted Draft Goods 71. How Documentary Collections Work: Avalized Drafts Buyer Buyer¶s Bank Seller Contract Goods Documents adds aval Accepted Draft 72. How Documentary Collections Work: Avalized Drafts Buyer Seller Contract Documents Avalized Draft Documents Buyer¶s Bank Goods Accepted Draft 73. How Documentary Collections Work: Avalized Drafts Buyer Buyer¶s Bank Seller Contract Avalized Draft Documents Goods Accepted Draft Documents Payment 74. How Documentary Collections Work: Avalized Drafts Buyer Buyer¶s Bank Seller Contract Avalized Draft Documents Payment Goods Accepted Draft Documents Payment Avalized Draft 75. Risk Mitigation Techniques 76. Risk Mitigation Techniques o Open-Account-related techniques o Factoring 77. Risk Mitigation Techniques 78. Risk Mitigation Techniques o Open-Account-related techniques o Factoring 79. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables 80. Risk Mitigation Techniques 81. Risk Mitigation Techniques o Open-Account-related techniques o Factoring
o Non-recourse sale of receivables 82. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables o Credit insurance 83. Risk Mitigation Techniques 6. Contract repudiation insurance is available as separate coverage. 84. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables o Credit insurance 85. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables o Credit insurance o Credit derivatives 86. Risk Mitigation Techniques 87. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables o Credit insurance o Credit derivatives 88. Risk Mitigation Techniques o FX contracts o Forwards & futures o Options 89. Risk Mitigation Techniques 90. Commercial Letters of Credit 91. Standby Letters of Credit & Demand Guarantees 92. Forfaiting 93. Sale of Receivables 94. Credit Insurance 95. Credit Derivatives 96. Foreign Exchange Contracts 97. Credit Policy Matrix o Unconfirmed LC o Cash in advance o Demand guarantee or standby LC
1 Low 2 Moderate 3 High 4 Very High Country Risk 4 Very High 3 High 2 Moderate 1 Low Customer Risk
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Unconfirmed or confirmed LC Cash in advance Local guarantee or confirmed standby LC Demand guarantee or standbyLC Confirmed LC Cash in advance Local guarantee or confirmed standby LC Cash in advance Confirmed LC Unconfirmed LC Demand guarantee or standby LC Factoring Credit insurance (commercial risks) Confirmed Authority to Pay Unconfirmed or confirmed LC Local guarantee or confirmed standby LC Demand guarantee or standbyLC Credit insurance (commercial risks or comprehensive)
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Confirmed Authority to Pay Confirmed LC Credit insurance (comprehensive) Local guarantee or confirmed standby LC Confirmed Authority to Pay Confirmed LC Credit insurance (comprehensive) Cash in advance Local guarantee or confirmed standby LC Confirmed Authority to Pay Factoring D/P collections D/A collections w/ forfaiting Credit insurance (commercial risks) Unconfirmed LC Authority to Pay Confirmed LC D/A collections w/ forfaiting Credit insurance (comprehensive) D/P collections Confirmed Authority to Pay Confirmed LC D/A collections w/ forfaiting Credit insurance (comprehensive) Cash in advance Confirmed Authority to Pay Open account D/A collections Factoring Open account D/P collections D/A collections w/ forfaiting Credit insurance (political & economic risks) D/P collections D/A collections w/ forfaiting Countertrade Credit insurance (political & economic risks) Cash in advance D/A collections w/ forfaiting Countertrade
Denotes µHigh to Very High Risk¶ areas which may require significant risk neutralization NB: This document is for illustrative purposes only, and is not intended to delineate the recommendations of Atradius regarding risks associated with international trade D/P collections D/A collections w/ forfaiting Credit insurance (commercial risks or comprehensive) Unconfirmed or confirmed LC Authority to Pay 98. November 30, 2006 - CMA Webinar ± Buddy Baker Black Slide
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1. 2. 3. A Comparison of Techniques for Mitigating Credit Risks CMA Webinar November 30, 2006 Buddy Baker, Atradius Trade Credit Insurance buddy.baker@ atradius .com Identifying Export Risks Identifying Risks in Cross-Border Sales o What might go wrong o Commercial risks o Political risks o Transfer/economic risks o Foreign exchange rate fluctuation risks Identifying Risks in Cross-Border Sales Slow payment/default Bankruptcy Contract repudiation Commercial risk Contract dispute Abusive bond drawing Financing risk Contract risk Identifying Risks in Cross-Border Sales Slow payment/default Bankruptcy Contract repudiation Contract dispute Abusive bond drawing Financing risk Contract risk Commercial risk Foreign exchange control legislation Discharge of debt legislation Government repudiation of debt Payment moratorium Insurrection/overthrow/domestic turmoil Non-payment due to war Non-payment due to natural disasters Country risk Political risk Currency inconvertibility Transfer/economic risk Identifying Risks in Cross-Border Sales Slow payment/default Bankruptcy Contract repudiation Contract dispute Abusive bond drawing Financing risk Contract risk Commercial risk Foreign exchange control legislation Discharge of debt legislation Government repudiation of debt Payment moratorium Insurrection/overthrow/domestic turmoil Non-payment due to war Non-payment due to natural disasters Country risk Political risk Currency fluctuation/devaluation FX risk Currency inconvertibility Transfer/economic risk Identifying Risks in Cross-Border Sales o What might go wrong o Commercial risks o Political risks o Transfer/economic risks o Foreign exchange rate fluctuation risks Depending on the goods, it may make a big difference whether things go wrong before or after shipment 8. Choosing Credit/Payment Terms The spectrum of credit/payment terms Extended terms, installment notes Open account, clean drafts Time draft (D/A) Consignment/retention of title Sight draft (D/P, C.A.D.) Cash against goods, C.O.D. Advised letter of credit: sight & time Confirmed letter of credit Cash in advance 9. Choosing Credit/Payment Terms o The spectrum of credit/payment terms o Extended terms, installment notes o Open account, clean drafts o Time draft (D/A) o Consignment/retention of title o Sight draft (D/P, C.A.D.) o Cash against goods, C.O.D. o Advised letter of credit: sight & time o Confirmed letter of credit o Cash in advance 10. Risk Mitigation Techniques 11. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µ Silent L/C confirmation¶ o Standby L/C
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Independent/demand guarantee Accessory/contract guarantee, surety bond Sight draft, µdocuments against payment¶ Avalized draft & forfaiting Factoring Non-recourse sale of receivables Credit insurance Credit derivatives Forwards & futures Options
Guarantees Documentary-Draft-Collection-related techniques Open-Account-related techniques FX contracts 12. Risk Mitigation Techniques 13. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C 14. How Letters of Credit Work: Theory Buyer Seller Contract Buyer¶s Bank Letter of Credit Application 15. How Letters of Credit Work: Theory Buyer Seller Contract Buyer¶s Bank Letter of Credit Application Letter of Credit 16. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Letter of Credit 3 parties 3 independent contracts 17. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Letter of Credit Principles of Letters of Credit: Independent and Documentary Goods Documents 18. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Letter of Credit Goods Payment 19. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Letter of Credit Goods Documents Payment Debit 20. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Documents Payment Debit Letter of Credit Goods 21. How Letters of Credit Work: Reality Foreign Buyer Buyer¶s Bank Advising Bank Seller¶s Bank Seller Negotiating Bank Freight Forwarder Reimbursing Bank Contract L/C Appli-cation Docu-ments L/C L/C L/C L/C & Documents Documents Payment Payment Reimbursement Authorization Reimbursement Goods Goods Reimbursement Claim Debit 22. Risk Mitigation Techniques 7. A receivable in a foreign currency made be sold, including the remaining currency fluctuation risk. 8. FX exposure depends on the currency of the credit. 23. Risk Mitigation Techniques 1. It may be possible for the applicant to obtain a court injunction to stop payment of a non-negotiable L/C. 24. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C 25. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C 26. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Documents Debit Letter of Credit Goods Payment 27. How Confirmed Letters of Credit Work Buyer Seller Docu-ments Pay- ment Goods Contract Confirming Bank L/C L/C Debit Documents Payment Buyer¶s Bank L/C Appli-cation Docu-ments 28. Risk Mitigation Techniques 29. Problems with Confirming Banks o The Confirming Bank is chosen by the Issuing Bank o The Confirming Bank has a monopoly position o The Confirming Bank may be an affiliate of the Issuing Bank o The Confirming Bank can be enjoined from making payment # 30. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C 31. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ 32. How Commercial Letters of Credit Work Seller Buyer Negotiating Bank Docu-ments Goods Contract Debit Documents Payment Pay- ment Buyer¶s Bank L/C Appli-cation L/C Advising Bank L/C Docu-ments
33. Risk Mitigation Techniques 34. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ 35. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Standby L/C 36. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Assignment of proceeds 37. Assignments of Proceeds o Security interest in a contingent asset o Not top of the priority list (U.S. law): 1. transferred L/Cs 2. holders-in-due-course (cut off by endorsing the L/C) 3. third-party payees(?) 4. set-off rights of Negotiating Bank/Issuing Bank 5. prior perfected assignees of proceeds with ³control´ 6. holder of a perfected assignment of proceeds with ³control´ 7. holders of general, perfected security interests 8. general creditors 38. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Assignment of proceeds 39. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Assignment of proceeds o Transferable L/C 40. Risk Mitigation Techniques o Letter-of-Credit-related techniques o Unconfirmed L/C o Confirmed L/C o µSilent L/C confirmation¶ o Assignment of proceeds o Transferable L/C o Standby L/C 41. How Letters of Credit Work: Theory Buyer Buyer¶s Bank Seller Contract Letter of Credit Application Documents Documents Payment Debit Letter of Credit Goods 42. How Standby Letters of Credit Work Applicant Applicant¶s Bank Beneficiary Contract Letter of Credit Application Letter of Credit Payment 43. How Standby Letters of Credit Work Applicant Applicant¶s Bank Beneficiary Contract Letter of Credit Application Letter of Credit Documents Documents Payment Debit 44. Risk Mitigation Techniques 2. Preferential payment risk exists unless the standby is properly worded. 3. Country risks are covered if the L/C is confirmed by a ³developed-world´ bank. [7. A receivable in a foreign currency made be sold, including the remaining currency fluctuation risk.] 45. Risk Mitigation Techniques o Guarantees o Independent/demand guarantee o Accessory/contract guarantee, surety bond
46. Standby L/Cs vs. Guarantees & Bonds Standby L/C Demand Guarantee Accessory/Contract Guarantee, Surety Bond Independent & payable against documents Independent & payable against documents Specified amount Specified amount Payable upon occurrence of specified event Amount of damages (usually with a maximum) Specified expiry Usually has a specified expiry Expiry event Rules: UCP or ISP (and UCC5 in the U.S.) Rules: URDG, ISP, or local law Rules: Local law 47. Risk Mitigation Techniques 4. Country risks are covered if the guarantee is a µlocal guarantee¶. 5. If the principal repudiates the contract, the guarantor may do the same. Be sure you know which kind of guarantee you¶re dealing with 48. Risk Mitigation Techniques o Documentary-Draft-Collection-related techniques o Sight draft, µdocuments against payment¶ 49. How Documentary Collections Work: Sight Drafts Buyer Seller Contract 50. How Documentary Collections Work: Sight Drafts Buyer Seller Contract Goods 51. How Documentary Collections Work: Sight Drafts Buyer Seller Contract Buyer¶s Bank Documents Goods 52. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Goods 53. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Documents Goods 54. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Documents Payment Goods 55. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Documents Payment Goods 56. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Goods Documents Documents Payment Payment 57. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Goods Payment Documents Documents Payment 58. Risk Mitigation Techniques o Documentary-Draft-Collection-related techniques o Sight draft, µdocuments against payment¶ 59. Risk Mitigation Techniques o Documentary-Draft-Collection-related techniques o Sight draft, µdocuments against payment¶ o Avalized draft & forfaiting 60. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Goods Payment Documents Documents Payment 61. How Documentary Collections Work: Sight Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Goods 62. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Accepted Draft Goods 63. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Goods Accepted Draft Documents 64. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Goods Accepted Draft Documents 65. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Goods Documents Accepted Draft Documents 66. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Goods Accepted Draft Documents Payment 67. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Goods Accepted Draft Documents Accepted Draft 68. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Payment Accepted Draft Goods Payment Accepted Draft Documents 69. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Payment Documents Payment Accepted Draft Goods Accepted Draft Documents 70. How Documentary Collections Work: Time Drafts Buyer Buyer¶s Bank Seller Contract Documents Accepted Draft Goods 71. How Documentary Collections Work: Avalized Drafts Buyer Buyer¶s Bank Seller Contract Goods Documents adds aval Accepted Draft 72. How Documentary Collections Work: Avalized Drafts Buyer Seller Contract Documents Avalized Draft Documents Buyer¶s Bank Goods Accepted Draft 73. How Documentary Collections Work: Avalized Drafts Buyer Buyer¶s Bank Seller Contract Avalized Draft Documents Goods Accepted Draft Documents Payment 74. How Documentary Collections Work: Avalized Drafts Buyer Buyer¶s Bank Seller Contract Avalized Draft Documents Payment Goods Accepted Draft Documents Payment Avalized Draft 75. Risk Mitigation Techniques 76. Risk Mitigation Techniques o Open-Account-related techniques o Factoring 77. Risk Mitigation Techniques 78. Risk Mitigation Techniques o Open-Account-related techniques o Factoring 79. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables 80. Risk Mitigation Techniques 81. Risk Mitigation Techniques o Open-Account-related techniques o Factoring
o Non-recourse sale of receivables 82. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables o Credit insurance 83. Risk Mitigation Techniques 6. Contract repudiation insurance is available as separate coverage. 84. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables o Credit insurance 85. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables o Credit insurance o Credit derivatives 86. Risk Mitigation Techniques 87. Risk Mitigation Techniques o Open-Account-related techniques o Factoring o Non-recourse sale of receivables o Credit insurance o Credit derivatives 88. Risk Mitigation Techniques o FX contracts o Forwards & futures o Options 89. Risk Mitigation Techniques 90. Commercial Letters of Credit 91. Standby Letters of Credit & Demand Guarantees 92. Forfaiting 93. Sale of Receivables 94. Credit Insurance 95. Credit Derivatives 96. Foreign Exchange Contracts 97. Credit Policy Matrix o Unconfirmed LC o Cash in advance o Demand guarantee or standby LC
1 Low 2 Moderate 3 High 4 Very High Country Risk 4 Very High 3 High 2 Moderate 1 Low Customer Risk
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Unconfirmed or confirmed LC Cash in advance Local guarantee or confirmed standby LC Demand guarantee or standbyLC Confirmed LC Cash in advance Local guarantee or confirmed standby LC Cash in advance Confirmed LC Unconfirmed LC Demand guarantee or standby LC Factoring Credit insurance (commercial risks) Confirmed Authority to Pay Unconfirmed or confirmed LC Local guarantee or confirmed standby LC Demand guarantee or standbyLC Credit insurance (commercial risks or comprehensive)
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Confirmed Authority to Pay Confirmed LC Credit insurance (comprehensive) Local guarantee or confirmed standby LC Confirmed Authority to Pay Confirmed LC Credit insurance (comprehensive) Cash in advance Local guarantee or confirmed standby LC Confirmed Authority to Pay Factoring D/P collections D/A collections w/ forfaiting Credit insurance (commercial risks) Unconfirmed LC Authority to Pay Confirmed LC D/A collections w/ forfaiting Credit insurance (comprehensive) D/P collections Confirmed Authority to Pay Confirmed LC D/A collections w/ forfaiting Credit insurance (comprehensive) Cash in advance Confirmed Authority to Pay Open account D/A collections Factoring Open account D/P collections D/A collections w/ forfaiting Credit insurance (political & economic risks) D/P collections D/A collections w/ forfaiting Countertrade Credit insurance (political & economic risks) Cash in advance D/A collections w/ forfaiting Countertrade
Denotes µHigh to Very High Risk¶ areas which may require significant risk neutralization NB: This document is for illustrative purposes only, and is not intended to delineate the recommendations of Atradius regarding risks associated with international trade D/P collections D/A collections w/ forfaiting Credit insurance (commercial risks or comprehensive) Unconfirmed or confirmed LC Authority to Pay 98. November 30, 2006 - CMA Webinar ± Buddy Baker Black Slide
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