Mitigating International Trade Risk
Global Supply Chain Management Conference
State University of New York College at Plattsburgh
June 17, 2010
Today’s Agenda
• Review Global Market Trends - Trade Finance
• Discussion of Trade Finance solutions and effectiveness in
the current markets
• Go Forward trends and suggestions to optimize
International Trade sales strategies
• Review of Foreign Exchange Solutions and current market
trends
Impact of the Crisis
Global View
Volume of World Merchandise Exports (Annual % Change)
•Sharpest Decline in 70 years – (2% 1982, -7% 1975)
•Global crisis, 12.2% contraction in global trade volumes
• WTO “Trade is set to rebound 9.5% in 2010”
•Persistent unemployment, intensify protectionist actions?
Source: World Trade Organization Secretariat March 26, 2010 Press Release
What Industries were impacted
Global View
% change by Quarter valued in Current US$, Source WTO Secretariat estimates
Industry SECTORS
Q3 2008
Manufactures All
13.2
Iron and Steel
42.7
Chemicals
21.7
Office and Telecom
7.2
Automative Products
3.4
Industrial Machinery
15.7
Textiles
3.4
Clothing
7.9
Q4 2008
-10.4
5.4
-5.9
-13.9
-26
-7.3
-12.8
-2.5
Q1 2009
-27.6
-37.3
-23.5
-28.4
-46.9
-28.8
-26.9
-10.4
Q2 2009
-29.8
-54.7
-24.4
-22.2
-45.6
-36
-26.8
-15.5
Q3 2009
-21.5
-55
-16.6
-15.3
-28.6
-31.9
-17.3
-12.1
•GREAT Recession, Steepest decline first 9 months 2009
•Economic uncertainly, households and firms easily reduced short term spending
•Iron and Steel decline final factor to reinforced 2009 trade slump
•International Supply Chains / information technology, each region respond instantly to
market conditions
•Exports and Imports all countries fell as the same time, unlike the past declines
How did the crisis impact the US?
US Only View
{$ in billions}
US EXPORTS
US IMPORTS
US TRADE BALANCE
2005
901
1,673
(772)
Year over Year change
2006
2007
2008
1,025
1,148
1,247
1,853
1,956
2,103
(827)
(808)
(816)
2009
1,056
1,557
(501)
Major Changes reflected in 2009
•Imports decline -26% all sectors (consumer demand)
• Exports- declines 18% support of global nature of recession
•Trade Deficit Declined $315 billon 39% improvement (not adjusted for
Oil Price changes)
January 2010.. President Obama has initiated a directive to
double US Exports over the next 5 years
TOP TRADE Partners?
US Only View
Country
Exports
Canada
202
Mexico
129
China
70
Japan
51
United Kingdom
46
Germany
43
Netherlands
32
South Korea
29
France
27
Brazil
26
Singapore
22
Taiwan
18
Italy
12
India
16
Venezuela
9
All others
324
1,056
Top US Trading Partnes 2009 based $ value (Billions)
Imports Balance
What do we Buy?
225
(23)
Oil & Gas, Autos
177
(48)
Crude,Auto's Elect'l Appl, Telecom
296
(227)
Houshold,Elect'll gds, Computrs
96
(45)
Auto/prts,Comptrs,Indust'l Mchs
48
(2)
Medical Equip,Auto,Aircraft Prts
71
(28)
Auto,Medical Equip, Indust'l Mchns
16
16
Petro Prds,Indust'l Mchn, Nuclear Fuel
39
(11)
Autos,Household Gds,Computr/Prts
34
(8) Civil Aircraft, Medical Equip, Alchlc Bev
20
6
Crude,Metal/Alloys, Cv'l Aircrft
16
7
Comptrs, Medical, Organic Chem
28
(10)
Comptrs/tecm, Hshold gds, Eletrc
26
(14)
indust'l Mch,Petro Prds, Med Equip
21
(5) Apparel,Jewlery/Diamonds, Med.Equip
28
(19)
Crude/Oil related Pdts
415
(133)
1,557
What do we Sell?
Indust'l Mchs, Autos, Agric
Indust'l Mchs, Metal, Food/Agric
Metals,Chem/Plstcs,Indust'l
Agric, Chem/ Plstcs, Civil Aircraft
Metals,Indust'l Mch, Civil Aircraft/prts
Auto prts,Pharmaceutical,Mchry/Elct
Cheml/Plstc,Pharm'l,Petro/Fuel
Plstc/chem, Indust'l Mchn, Agric
Aircrft/prts,Industt'l Mchnes, Pharm'l
Platic, Indust'l Mch, Cv'l Aircraft
Plstc/chem, Indust'l Mch,Semicndcts
Semicndctrs,Indust'l Mchns, Agric
Indust'l Mchs,Metals, Pharm'l
Metals,Indust'l Mch,
(501)
What would the impact be by doubling Exports?
New Realities in International Finance
Cross Border Sales and Purchases will have added complexities We
will focus on three implications : Liquidity, Risk and Credit.
Buyer
Contract
Negotiations
Objective: Extend Payment Terms
New Issues to Consider
• Inventory Strategy: Balance of need
against projected sales?
• New Financing Cost (Borrowing Ratios)
• Critical Suppliers may not survive under
old terms
• Transportation cost: may be able to
negotiate better terms
• New Markets viable but product quality
and delivery must factored
Seller
Objective: Shorten Payment Terms
New Issues to Consider
• Shorter payment terms DSO
• Compliance (No Shipping delays)
• No foreign exchange risk
• Buyer credit ? How will in be
funded
• US dollar denominated sales can
be challenged
• Financing Costs- will trend higher
International Trade Finance: New Implications
Regardless if you are a buyer or seller cash management challenges related
Financing Decisions will impact profitability:
US EXPORTERS: Offshore Buyers
 Late payment / Country Risk / Credit Default
 Currency risk: Continue to invoice in $ terms?
 A/R financing: Can you finance ?
 Provide Foreign Buyer Terms (Government Programs)
US IMPORTERS: Offshore Suppliers/ Sellers
 Inventory Strategy: Does “Just in time” still work?
 Funding alternatives
 Sight payment with BA financing
 Buy in Currency with Hedge
 PO versus LC “Days Payment Outstanding”
Supplier Viability, Foreign Buyer credit Challenges
 Tight Credit Markets can limit buyers purchasing options
Cross Border Payment Solutions
International Treasury – Core Issues
Cash Flow Complexities
•
Differing regulations & banking practices
•
Dispute resolution resulting in payment delays
Multiple Currencies
•
Foreign exchange & interest rate fluctuations / volatility
•
Account information consolidation / netting
Political Risk & Compliance
•
Local business laws and regulatory environment
•
Tax, tariffs, customs and trade documents / compliance
Procurement and Sales Policies – Should be Periodically Reviewed
•
Potential developments: recession, significant volatility in interest rates?
•
Decision-making authority and flexibility: centralized, regional or local
country and currency risk: establish limits and related trade credit terms
•
Depository bank risk: how many banks?
•
Contract risk and terms: should be specific to country of counterparty
International Treasury – Major Trends Going Forward
• The current downturn in the credit and funding cycles will create increased demand
for traditional trade finance solutions.
• Growth trends will continue for open account transactions but at reduced rate; there
will be continued pressure on the US Dollar, expanding the need for multicurrency
deposits, payments and consolidated balance reporting
• Effective credit solutions, especially for SME’s for both inventory purchases and
foreign receivables, will be important drivers for working capital efficiencies.
• Closer working capital integration of trade finance and core cash management
products and processes will be critical to maximize the effectiveness of liquidity and
profitability.
• Technologies that leverage web-based solutions and collaboration between buyers,
sellers and their respective banks will continue to be a major driver of change.
“KeyBank has established an integrated working capital approach which combines a
comprehensive set of products and services to enable our clients to manage their cross border
activities profitably, regardless if payment terms are trade finance or open account based. This
provides effective product transitioning as our clients’ offshore business grows and counterparty
relationships mature.”
Cross Border Trade Tools
Core Trade Topics
• Mitigating Risk
• Traditional Documentary Trade Products
• Turning Foreign Receivables to Cash
• What is Appropriate for your business
What are Exporters Looking for?
Customer Objectives
• Expand into new markets
…without incurring undue risk
…without adverse impact on corporate cash flow
or balance sheet
…. GETTING PAID
What are Exporters Looking for?
Customer Needs in Cross-Border Sales
•
•
•
•
•
Risk mitigation
Assistance with cross-border collections
Financing
Information
Automation and other outsourcing
Cross-Border Trade Risk Ladder - Drives Receivable and Payables Needs
Contract
Negotiations
Buyer
Open Acct Purchase
Low
Seller
Low
Confirmed L/C
Doc. Collectionagainst Payment
Letter of Credit
Documentary
Collection
Letter of Credit
Open Acct Sale
Pre pay- Cash in Advance
Less Advantageous
Cash in Advance
High High
Less Advantageous
Letters of Credit
•
•
•
•
•
Traditional means of payment assurance
Basis for several products and services
Benefits for both parties
“Independence” principle
Learn “advise” “confirm” “negotiate”
Letter of Credit Transaction Flow
Goods (5)
(1)
(11)
Buyer/
Importer/
Applicant
(2)
(10B)
(1)
(4)
(5)
(10A)
(7)
Issuing
Bank
Seller/
Exporter/
Beneficiary
(2)
(3)
(8)
(3)
(6)
(9)
(4)
Advising/
Negotiating/
Confirming
Bank
Sales Contract
Purchase Order
Proforma Invoice
L/C Application
Original Letter of Credit
SWIFT/Telex/Mail
Original Letter of Credit to
Seller/Exporter/Beneficiary
Shipment of Goods
(6)
Dox to Negotiating Bank
(7)
Dox to Issuing Bank
(8)
Payment
(9)
Payment
(10A) Dox to Buyer
(10B) Payment
---------------------------(11)
Buyer sends Dox to
Broker/Carrier
How Letters of Credit Really Work
Goods
L/C
Contract
Foreign
Foreign
Buyer
Buyerss
Seller
Seller
Goods
Freight
Freight
Forwarder
Forwarder
L/C
L/C
Appli cation
Debit
Payment
Advising
Advising
Bank
Bankss
Docu ments
Buyer’s
Buyer’s
Bank
Bankss
Reimbursement
Authorization
L/C &
Documents
Seller’s
Seller’s
Bank
Bank
L/C
Payment
Documents
Reimbursing
Reimbursing
Bank
Bankss
Advising
Advising
Bank
Bankss
Reimbursement
Claim
Reimbursement
Documentary Collection Transaction Flow
(1) Seller and buyer negotiate a
sales contract or purchase order
providing for payment by
documentary collection
(documents against
payment/acceptance).
Goods (2)
Buyer/
Importer/
Drawee
Contract (1)
Documents (6)
Documents
(4)
Money (7)
(2) Seller dispatches goods to buyer.
(3) Seller delivers documents and
draft to remitting bank.
(4) Remitting bank forwards
documents and draft to collecting
bank along with collection
instructions.
Documents (3)
Money (5)
Collecting
Bank
Seller/
Exporter/
Principal
Money (8)
Remitting
Bank
(5) Buyer makes payment to
collecting bank in case of sight
draft, or accepts a time draft.
(6) The collecting bank releases
documents so that the buyer can
take delivery of the goods.
(7) The collecting bank transfers
funds to the remitting bank.
(8) The remitting bank transfers
funds to the seller.
Documentary Collection
Advantages
• Seller/banks control shipping documents
• In most cases, payment more prompt than open account
• In most cases, less expensive than letter of credit
• Less processing requirements than letter of credit
Disadvantages
• Payment not guaranteed
• Collection time longer than L/C and cash-in advance
• Less document control with air shipments
• Release of documents prior to payment obligation
under “time” draft collection
Standby Letter of Credit
Represents an obligation to the beneficiary on the part of the
issuing bank to:
•
•
•
Repay money borrowed by the applicant (or advanced to or for the
account of the applicant);
Make payment on account of any indebtedness undertaken by the
applicant; or
Make payment on account of any default by the applicant in the
performance of an obligation.
Serves as a back-up or secondary means of payment, though it
is recognized as a primary obligation of the issuing bank
•
Commercial documentary credit is activated by the “performance” of the
beneficiary. The standby credit, by contrast, supports the beneficiary in
the event of a “default.”
Export Services
Non-Traditional Products
• “Silent Confirmation”
• The Cash Accelerator Program (“CAP”)
Traditional Product Set
• Export letters of credit
• Export collections
• Bankers’ acceptances
• Export-related standby L/Cs (bid and performance bonds,
Advance payment guarantees)
• Purchase of insured or factored receivables (limited recourse)
• Loans against asset base including foreign receivables (full recourse)
Electronic Products
• Online L/C advisor
• Draft collection initiation
Export-Import Bank Programs
Lending (post-export)
Guarantees (pre- and post-export)
Credit insurance (post-export)
Product Restrictions
• Large aircraft
• Nuclear power plants
• Military sales:
 Drug interdiction
 Dual use / humanitarian purpose
SBA Export Working Capital Program
Similar to ex-im bank program
Maximum loan value is $2,000,000
Guarantee is 90%
Can support sales of military equipment
SBA fully secured
Conclusion
Cross border trade tools can:
• Mitigate risk
• Speed payments
• Provide information and reporting
PROPER ASSESSMENT WILL PROVIDE REWARDS
Foreign Exchange
Types of Currency Exposure
A.
Transaction exposure is the risk associated with adverse exchange rate fluctuations from a
foreign currency receivable and/or payable. Transaction exposure is often referred to as foreign
currency cash flow exposure, due to cash flows being directly affected by transaction exposure.
Foreign exchange gains or losses are accounted for financial statement purposes in a company's
income statement.
NOTE: In the U.S., Financial Accounting Standards Board (FASB) Statement 52 & 133,
address the proper accounting treatment for foreign currency transactions.
B.
Translation exposure is the risk of adverse exchange rate fluctuations through long-term assets
and/or liabilities being denominated in foreign currency. Translation exposure is often referred to
as balance sheet exposure. Because there are no cash flows directly involved in translation
exposure, foreign exchange gains or losses are typically accounted for in a corporation's
statement of retained earnings rather than the income statement.
C.
Economic Risk is the opportunity risk associated with conducting business only in U.S. dollars
regardless of the customers physical location. If a competing supplier is located in the same
country as the customer and is pricing its product in local currency, the buyer may choose the
competition due to the competitive pricing advantage created by pricing in local currency or
simply not wanting to handle the foreign exchange risk associated with purchasing
in US dollars.
HEDGING
Insuring a worst-case exchange rate or protect a cost in USD
Spot: The purchase or sale of one currency against another at a set rate,
usually for delivery in 2 days (USD/CAD is a 1 day delivery)
Forward: The purchase or sale of one currency against another at an
agreed upon rate for delivery on a specified date or within a
delivery period in the future (more than two business days).
Forward rates represent the current value of a currency for delivery
in the future.
Currency Options: Are agreements to buy (call) or sell (put) the
RIGHT to buy or sell a specified currency at a specified price and
date. For this right the customer usually pays an upfront premium.
The premium can be reduced or eliminated by combining different
options to reduce upside potential.
Some Typical Responses
Some responses from companies when asked about Foreign Exchange:
1. We don’t speculate.
2. We just invoice our foreign clients in U.S. dollars.
3. Our foreign sales are not significant.
3. We don’t have the staff to manage the foreign currency.
5. We do not understand the accounting issues.
6. Fx is not really a problem for us.
KeyBank helps companies develop a currency hedging strategy and explain
innate risks associated with inaction.
1. Help firms understand how to protect margins against currency fluctuations and simplify currency
strategy. An appropriate strategy may be as simple as transacting when exchange rates are
favorable.
2. Take control of the pricing process and reduce earnings volatility. Through hedging, companies
can reducing the exposure to cyclical currency trends and help meet projected budgets.
Benefits could include reducing or eliminating the need to change suppliers
or layoff workers.
Tailored strategies for unparalleled risk management
Key provides timely and strategic advice focusing on currency movements, fundamental and technical trends, and market
expectations to significantly enhance your outcomes related to your foreign exchange exposure-management activities. Whether
you are buying or selling products, acquiring or divesting a foreign company, or investing in foreign markets, our transaction
quotes are extremely competitive and our settlement services and capabilities deliver unrivaled execution. The net result, Key’s
Foreign Exchange Services reduce costs and minimize the inherent risks of conducting business in foreign currencies.
Key can assist you with a comprehensive portfolio of products and services:
Transaction services
Advisory services
• Spot transactions
• Forward, swap, and maturity window contracts
• Options and option derivatives − puts/calls, range forwards,
participating forwards, average rate options, and more
• Foreign currency loans
• 24-hour order capability
• Online dealing capabilities
• Superior settlement capabilities
• Available for all tradable currencies
• Expert advice on structuring hedging strategies
• Assistance with development of risk-management policies,
procedures, and strategies
• Emerging markets capabilities
• Market commentary and analysis, daily research expertise
• Monitoring of currency rate fluctuations, as well as economic and
political forces that drive them
Superior technology and expertise for superior risk management
Our expert trading team continually monitors the three-trillion-dollar-a-day international currency market using a technologically advanced network of
Interbank trading platforms. This global network provides instantaneous access to both long- and short-term fundamental and technical analysis – to
ensure the risk-management strategies we develop for you are driven by the most accurate and up-to-date information available. We also offer 24/7 order
capability and online dealing technology.
World-class sales and back-office professionals providing seamless coverage
Our experienced team of foreign exchange and settlement professionals brings you an integrated approach to service. The result is a synergy that is
driven by a passion for excellence and backed by our industry leading Foreign Exchange Operations Group. Our attention to detail ensures your foreign
exchange transactions are settled promptly and accurately. Key has also developed an integrated settlement process that enables us to deliver reliable
and accurate trading confirmations on a timely basis.
KeyBank delivers the convenience, expertise, products, and technical capabilities you need to achieve your objectives.
Contact a Key Foreign Exchange Professional near you:
Seattle
800.304.1402
425.709.4389
Cleveland
800.990.7647
216.689.5206
New York
800.539.3679
917.368.2323
Boston
800.539.3679
617.350.8480
© 2007 KeyCorp
key.com/foreignexchange
Contact Information
Bobby Uy
Vice President
Senior International and FX Sales
(585) 238-4155
alberto_q_uy@keybank.com