Academy of Economic Studies
Faculty of International Business and Economics
“International Finance and Payments”
Lecture VIII
“International Credit Market”
Lecturer Cristian PĂUN
Email: cpaun@ase.ro
URL: http://www.finint.ase.ro
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;
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International Credit Market
International Market
Dimension (2002)
Credit Market
9446 bil. USD
Bond Market
31000 bil. USD
Stock Market
3500 bil. USD
A. Credit Market (general situation)
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%
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International Credit Market
B. Credit Market (by the maturity)
Area
Total Credit
Developed Countries
Offshore Countries
Developing Countries
< 1year
53,1 %
56 %
52 %
46,7 %
> 1 year
27,7 %
24,3 %
36,9 %
43 %
World Bank: "Global Development Finance", 2000 - 2001
C. Credit Market (by the destination)
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 %
World Bank: "Global Development Finance", 2000 - 2001
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International Credit Market
D. Credit Market (creditors by origin)
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 %
E. Credit Market
(country distribution)
Countries
Weight
US
16 %
EU
54.6 %
UK
13 %
GER
8.4 %
ITA
5.4 %
JAP
5.6 %
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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.
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International Credit Market
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
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Short term credits
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A. Short term credits – Export Pre-financing
Producer
Exporter
1
4-5
2
6
3
Exporter’s Bank
Government
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.
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B. Credit based on B/E discount
Exporter
Importer
1
3
5
2
4
X Bank
Other bank
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.
Discount value  Nominal value  (1 
Discount tax  N days
100  360
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)
10
C. Importer Banker’s Acceptance
Exporter
4
1
Importer
3
2
Exporter Bank
5
Importer Bank
5
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.
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D. Exporter Banker’s Acceptance
1
Exporter
4
3
Importer
2
5
Exporter Bank
Importer Bank
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.
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E. Credit transfer
Exporter
Importer
1
2
3
4
5
Financing
Company
Importer’s Bank
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.
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F. Revolving Credit Agreements
Revolving Credit Agreement -- A formal, legal commitment to
extend credit up to some maximum amount over a stated period
of time.




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.
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G. Line of credit
Line 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.
•
- 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.
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Long term credits
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A. Syndicated loans
1
Lead Manager
Beneficiary
2
Credit Management
Group
3
4
Group of the participant banks
Credit Memorandum
Bank A
5
Lecture 8: International Credit Market
Bank B
17
A. Syndicated loans – operations description
1. Contacting a leader bank
2. Creating the coordinating group (when the amount is important),
analyzing the beneficiary, establishing the credit conditions
3. Creating the group of participating banks
4. 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.
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B. Eurocredits
3
Beneficiary
Lead Manager
1
Bank A
4
Bank B
Bank C
2
Coordinating
Group
5
4
Capital transfer from
local markets
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B. Eurocredit – operations description
1. Contacting a leader bank
2. Creating the coordinating group (when the amount is important),
analyzing the beneficiary,
3. Establishing the credit conditions by analyzing the beneficiary
4. Contacting different banks that will provide funds trough revolving
credit arrangements to the coordinating group
5. Refinancing from local capital markets by issuing stocks and bonds.
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C. Seller Credit
5
Exporter
Importer
1
2
3
6
Exporter Bank
Guarantee bank
4
Export Credit Agency
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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 maturity
6. Seller Credit reimbursement
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D. Buyer Credit
1
Exporter
Importer
4
6
Exporter Bank
3
Insurance Company
2
5
Guarantee Institution
Export Credit Agency
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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 credit
4. 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
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E. Parallel Loans
1
Company A
USD Credit
Credit Contract
2
Company B
3
Subsidiary
of B
GBP Credit
Subsidiary of
A
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E. Parallel loan – operations description
1. Parallel loan contract
2. Granting a credit directly from A Company to B subsidiary from USA
expressed in USD
3. 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
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F. « Back-to-back » loans
1
2
Company B
Company A
2
Credit Contract
Bank A
Bank B
3
4
Credit in USD
Credit in GBP
Subsidiary
of B
Subsidiary of
A
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F. Back to back loan – operations description
1. Back to back loan contract
2. Obtaining a credit in USD for Company A and a credit in GBP for
Company B from their own local markets
3. Granting a credit directly from A Company to B subsidiary from USA
expressed in USD based on initial credit
4. 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)
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Special Credits
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G. Leasing contract
Banks
8
6
9
1
Leasing company
Importer
2
5
7
4
3
Exporter
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Insurance
Company
30
G. International Leasing contract – operations
description
1.
2.
3.
4.
5.
6.
7.
8.
9.
Signing a leasing contract for import of an equipment
Indicating the provider of equipment
Negotiating the contract
Insurance policy for the equipment
Delivering the equipment
Refinancing from banks
Paying the equipment
Paying the leasing taxes
Paying back the credits by the leasing company
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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
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Financial Impact of the leasing contracts
A. Balance Sheet with Purchase (co. finances $100,000 truck with debt)
Truck
Other assets
Total assets
$100,000
100,000
$200,000
Debt
Equity
Debt plus equity
$100,000
100,000
$200,000
B. Balance Sheet with Operating Lease (co. finances truck with an operating lease)
Truck
Other assets
Total assets
$
0
100,000
$100,000
Debt
Equity
Debt plus equity
$
0
100,000
$100,000
C. Balance Sheet with Financial Lease (co. finances truck with a capital lease)
Assets under capital
Obligations under
lease
$100,000
capital lease
Other assets
100,000
Equity
Total assets
$200,000
Debt plus equity
Lecture 8: International Credit Market
$100,000
100,000
$200,000
33
Leasing vs. Debt Financing: Potential Benefits
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.
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.
Leasing vs. Debt Financing: Potential Benefits
5) Tax Savings
Leases may provide a larger tax shield than that provided by
depreciation.
6) Ease of Obtaining Credit
It is often easier for riskier firms to obtain a lease than to obtain
debt financing.
Factoring with payment in advance (old fashion
factoring)
1
Exporter
Importer
2
3
4
5
6
Factoring company
Importer’s Bank
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Factoring with payment in advance (old fashion
factoring) – Operations descriptions
1.
2.
3.
4.
Export contract
Delivering the goods
Presenting the commercial documents for payments (invoices)
Paying in advance the presented invoices (less a commission an a
guarantee of 10%)
5. Paying at the maturity
6. 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
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I. Factoring with a payment at the maturity
1
Exporter
Importer
2
3
6
4
5
Factoring company
Importer’s Bank
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I. Factoring with payment at the maturity
– operations description
1.
2.
3.
4.
5.
Export contract
Delivering the goods
Presenting the commercial documents to the factor
Paying at the maturity
Transferring the money to the exporter (less a commission)
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J. . Forfeiting
1
Exporter
2
Importer
3
4
5
Forfeiting Institution
Importer’s Bank
- 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)
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J. . Forfeiting – operations description
1.
2.
3.
4.
5.
Export contract
Delivering the goods
Presenting the commercial documents to the forfeiting company
Paying the transaction against presented documents
Transferring the money to the forfeiting company at the maturiy
Note:
The exporter will pay an interest rate
This 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)
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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;

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