Posted on the site 20.03.2012
In the context of the globalization of the world economy, an important task of the state is the measures that stimulate the financing of exports. In order to provide financial support from the state, favorable conditions for investment are created. These measures apply mainly to finished products, mainly for the most promising engineering products. But it should be noted that the export cycle includes the study of the product and the market, production, marketing, delivery of goods and, ultimately, payment.
What financial instruments can be used to finance the early stages of the export cycle?
This article will focus on pre-export financing, which is provided to the manufacturer at the stage of production and shipment of products against future earnings expected from the export sale of goods.
In fact, almost all forms of financing can be used for pre-export financing, including overdraft and direct commercial lending, but we will take a closer look at the following structures:
— short-term pre-export loans with funding from foreign banks;
— bank guarantees for export operations;
— pre-export financing using a letter of credit with a “red/green clause”;
— structural pre-export financing.
On fig. Figure 1 shows a scheme for providing a short-term pre-export loan with funding from a foreign bank.
This type of financing is targeted and, as a rule, short-term. In terms of risks, this structure can be conditionally divided into two parts:
— foreign bank provides funding to the exporter's bank within the established unsecured limits;
— Russian bank lends to its client, accepting, if necessary, inventory items, equipment or other assets as collateral.
The exporter bears the costs in the form of interest on such loans.
The positive side of this structure is that the exporter has the opportunity to receive a loan for the entire amount of the export contract.
It should be remembered that in this case, the exporter, being a participant in a foreign economic transaction, is responsible, among other things, for meeting the requirements currency legislation. This means that the exporter is obliged to issue a transaction passport in the exporter's bank and ensure that the export proceeds are credited in full to the foreign currency account in the exporter's bank. Thus, the concept of a pledge of export earnings in favor of the exporter's bank is conditional, since the condition for the "passage" of export earnings through the transit and current accounts of the client is mandatory, and the repayment of the loan to the bank will be the last step in this transaction.
Bank guarantees can be a kind of export financing.
When concluding contracts that provide for the export of goods/services, as a rule, guarantees for the return of an advance payment and guarantees for the performance of obligations are used.
The advance payment return guarantee covers the risks of the buyer in the event that the exporter fails to fulfill its obligations to deliver the goods and (or) fails to return the previously received advance payment. The importer advances the counterparty after receiving a guarantee issued by a bank acceptable to him. Thus, the exporter receives the funding he needs before the goods are shipped from the buyer, and not from the bank, as in the previously considered case. The duration of this warranty varies, but is usually limited to the duration of the contract.
A performance guarantee ensures the payment of funds in the event that the supplier fails to fulfill its obligations to supply goods/render services to the extent and in accordance with the conditions stipulated by the contract. The term of such a guarantee, as a rule, coincides with the term of the contract.
A standby letter of credit may be used instead of a bank guarantee.
Guarantee/Standby Letter of Credit fees are usually borne by the exporter.
The scheme of using a bank guarantee in financing export operations is shown in fig. 2.
The use of this structure does not exempt the exporter from fulfilling the requirements of the currency legislation, the execution of a transaction passport and the transfer of export earnings are also necessary.
The Red Clause Credit, also known as Antisipatory, was designed to allow the seller to receive a portion of the amount stipulated in the letter of credit as an advance.
Historically, these letters of credit originated to secure the supply of wool from Australia to Europe, and part of the amount that was provided as an advance to the seller was printed in red ink.
This type of letter of credit has historically been used for the export of unprocessed commodities (cotton, grain, rubber) from the countries of the East to Europe and is associated with an advance payment in favor of the seller. Letters of credit with a "red clause" are now rare.
Banks generally do not use these terms, but prefer to use their own language to meet customer requirements.
The advance is usually paid against the receipt of the exporter/beneficiary indicating that he will ship the goods in accordance with the requirements of the letter of credit, and if he does not do so, he will return the advance or part of it corresponding to the unshipped goods.
Green clause letters of credit differ from red clause letters of credit in that they provide some security for the funds advanced. That is, such letters of credit contain a condition that allows the nominated bank to pay an advance to the beneficiary before shipment against security, for example, in the form of a temporary warehouse receipt confirming the placement of goods in a warehouse prior to shipment, in the name of the nominated bank or issuing bank. If the beneficiary fails to submit documents within the period specified in the letter of credit, the reimbursement obligations of the creditor may be repaid from the security.
The scheme of pre-export financing using a letter of credit with a "red / green clause" is shown in fig. 3.
Thus, the exporter receives export earnings in the amount of the advance payment stipulated by the contract before the shipment of the goods. As a rule, the advance payment is 20% of the contract amount. That is, the exporter is not able to get a loan for the entire amount of the export contract.
The financing bank in this structure is the issuing bank or other nominated bank. Repayment of the loan to the financing bank, including interest, is made by the importer within the previously agreed terms. The exporter is paid in advance without recourse to the latter. In fact, there is a concession by the exporter to the financing bank of the right to claim money against the importer.
Typically, a letter of credit with a "red clause" is used in settlements between enterprises that already have experience of working together. But nevertheless, in order to secure their risk, foreign counterparties may require the provision of a guarantee from the exporter's bank for the return of the advance.
This form of pre-export financing is a complex structural product. The subject of export is commodities and agricultural products (Commodities), which can be conditionally divided into the following groups:
1. Metals: aluminum, aluminum ore, copper, nickel, tin, zinc, steel, precious metals, etc.
2. Petrochemical products: crude oil, gas, coal, electricity, etc.
3. Near-commodities: cotton, sugar, cocoa, soybean, coffee, grain, tobacco, edible oil, etc.
Funding amounts are significant and can be $300-500 million. Financing terms vary from two to five years. To attract a shorter loan, it is necessary to make changes to the structure of the transaction, which we will discuss below.
The main difference between this financing structure and those mentioned above is that a foreign bank (creditor) builds direct credit relations with a Russian borrower/exporter. The Russian bank is assigned the role of a "passport bank". When implementing this structure, it is required to issue two transaction passports at once: under an export contract and under a loan agreement concluded between the exporter and the creditor.
The scheme of structural pre-export financing is presented in fig. four.
Thus, in this structure, the norm of Art. 19 federal law dated December 10, 2003 No. 173-FZ “On currency regulation and currency control”, which allows the transfer of export earnings to the accounts of residents or third parties opened with banks outside the Russian Federation in order to fulfill the obligations of residents under loan agreements with non-residents registered in FATF and OECD member countries. At the same time, it must be borne in mind that this loan agreement must be concluded for a period exceeding two years. Otherwise, the Russian exporter has no right to receive export earnings to his account opened with a bank abroad. He is obliged to credit the proceeds to an account in Russian authorized bank and repay the loan also from your account in a Russian bank. Structuring the transaction, thus, necessitates the mitigation of the additional risks of the borrower (payment, conversion, political, etc.).
When analyzing the risks, one should pay attention to the main ones that need to be assessed when implementing a structural pre-export financing transaction:
— risks of non-fulfillment of obligations by the manufacturer/exporter, i.e. risks associated with the production and delivery of goods, including the presence / absence of experience in export operations, the possibility of transporting and storing goods;
— payment, including conversion, risks. In the structure described above, these risks are transferred from Russian Federation to the country of the buyer or trader;
— financial risks, including risks associated with the loss of property rights, which are mitigated by issuing a pledge for exported goods;
— political risks, including the possibility of free export of a certain product, the availability of appropriate licenses and permits, guarantees/comfort risks government agencies, insurance;
— production risks associated with the quality and quantity of produced and exported goods;
— risks associated with the liquidity of goods in the foreign market;
— price risks associated with a possible change in prices for goods on the world market.
Summing up all of the above, one should pay attention to the fact that pre-export financing is always targeted and is associated with the main transaction, that is, with the export of goods. The structure of each transaction depends on many factors. Among the factors influencing obtaining a positive decision of the creditor to finance the exporter, the following can be distinguished:
— business and payment reputation of the exporting company;
— experience in foreign trade activities, the number of partners;
- transparency financial statements and financial flows;
- clarity of the vertical structure of the company;
— financial condition enterprise - manufacturer of products;
— clarity and unambiguity of the financed export scheme;
- availability of bank accounts and the amount of credit turnover on them;
— the number and size of transaction passports;
— availability of advised letters of credit.
It is also important to note that in order to successfully conduct the entire complex of contractual relations within the framework of pre-export financing, both the Russian exporter and the creditor bank must be well versed in the legislation of the buyer's country, since any legislation contains many nuances that can infringe on the rights of the Russian side.
L.M. Rylova, WestLB Vostok Bank (CJSC), Head of Department trade finance
The requirement for confirmation of a letter of credit may be written or added to its terms as follows: “We hereby add our confirmation to this documentary letter of credit and hereby we undertake to pay you the amount of the letter of credit (or part thereof) against the documents provided by you in accordance with the terms of the letter of credit.
Confirmation of a letter of credit, as a rule, is required if the parties to the supply agreement to some extent do not trust not only each other, but also the banks acting on each side in a letter of credit transaction. In this case, a third bank is selected that suits both parties (usually a first-class western bank), which confirms the letter of credit, thereby assuming an additional (to the issuing bank) obligation to pay upon presentation of documents that comply with the terms of such a letter of credit. The confirming bank, in most cases, is also appointed by the executing bank under the letter of credit, namely the bank that checks the documents under the letter of credit and decides on their compliance with its conditions. Thus, payment and verification of documents under a letter of credit are carried out through a confirming bank that suits both parties to the supply agreement. As a result, it is believed that the interests of the supplier and the buyer are more insured against improper performance of the contract.
It should be noted that the exporter may expose himself to additional risk if he agrees to accept a letter of credit that stipulates, as conditions for receipt of funds, documents to be issued by the buyer or on behalf of the buyer (for example, a forwarder's certificate indicating that the goods have been received by the buyer, or an inspection certificate, signed by the buyer). The exporter must make sure that the terms of the letter of credit do not provide for other documents, except for those, the form and content of which he himself controls.
Pre-export financing. Pre-export financing schemes were initially used in large financial and industrial holdings with established partnerships between their companies and the bank. Practice recent years shows that this form of financing is increasingly provided by banks as a full service to non-bank customers.
Pre-export financing is a loan issued by a bank to an exporter (in whose favor a letter of credit is opened) for the production or purchase of an exported product. In this case, the requirements of the bank issuing such a loan may include conditions on collateral, for example, the proceeds that will be credited to the exporter's account after presentation required documents to the bank. Banks usually require additional collateral from their clients.
The exporter can also, with the help of a letter of credit opened in favor of a foreign buyer, settle with his suppliers without taking money out of circulation and using bank loan. For example, it may use a transferable letter of credit, according to which the nominated bank, at the request of the exporter, transfers all or part of the amount under the letter of credit in favor of the suppliers of the exporting company. However, in Russian practice, in these cases, a linked letter of credit is more often used.
Associated letter of credit. When using this form of letter of credit settlement, the exporter actually deals with not one, but two letters of credit: one of them is opened by a foreign buyer in favor of the exporter, and the other letter of credit is opened by the exporter in favor of his supplier. At the same time, receipts from the first letter of credit (it is called the main one) must cover payments on the second. This form of letter of credit may be required, for example, when the exporter settles with suppliers in a currency other than the currency of the first letter of credit (the buyer transfers funds to the exporter in euros, and the exporter settles accounts with its Russian suppliers in rubles), when a transferable letter of credit cannot be used. However, in this case, two different letters of credit operate simultaneously, so the exporter's bank, although it takes into account the presence of the first letter of credit, usually requires additional collateral to open a new one. It should be noted that the execution of one letter of credit does not depend on the execution of the second.
Import letters of credit
For an importing company, the main purpose of opening a letter of credit is to deliver a quality product at a certain time and place.
Letter of credit with 100% cash coverage. In this case, a letter of credit can become an alternative to an advance in work under a foreign trade contract. If the importer has free financial means to pay for the goods, and also seeks to minimize the risks described above, then he can apply to his bank with an application to open a confirmed letter of credit in favor of the seller, transferring 100% of the amount of the letter of credit to an account with this bank. Unlike an advance payment, a covered letter of credit allows you to set such payment terms that protect the interests of the importer as much as possible (for example, specifying in the letter of credit the exact place and time of receipt of the goods, its required quantity and method of delivery guarantees that payment will not be made until the goods are shipped).
The risk of receiving low-quality goods can be minimized by indicating that documents issued by independent organizations are mandatory (for example, a certificate of product quality, quantity, compliance with GOST requirements, a veterinary certificate, a certificate of origin of goods). However, banks charge an additional commission for checking the submitted documents, which, as a rule, does not exceed 0.25-0.35% of the transaction amount.
Uncovered letter of credit with payment immediately upon submission of documents. This form of letter of credit settlement in import operations is the most common, since the scheme for its implementation is simple. When opening such a letter of credit, it is not required to place the amount of coverage in the bank in advance - the importer can pay for the goods only after they have been shipped. Having received confirmation of the opening of a letter of credit, the seller will ship the goods and submit the documents stipulated by the conditions to the bank that makes the payment. Thus, the importer does not divert his cash from the moment the letter of credit is opened until the payment is made by the confirming bank. Today, banks' commission for opening such a letter of credit (taking into account the cost of confirming a letter of credit by a foreign bank) is 7–8% per annum, although this amount may depend on the term of the letter of credit and the type of collateral provided.
Uncovered letter of credit with deferred payment. Depending on its financial capabilities, the seller can provide the importer with a trade credit. At the same time, he has a guarantee from his bank for payment under a letter of credit, and the importer does not have to take a loan from a bank or divert his working capital for payment. If a foreign seller refuses to provide a commodity credit under a letter of credit opened in his favor, the bank can offer the importer post-import financing (post-financing) of this transaction.
As part of the import operations of companies, VTB Bank offers a wide range of products and services for trade and export financing in related financing, financing under ECA coverage, post-import financing, as well as guarantee operations.
ECA-backed financing is provided primarily to importers of capital-intensive goods and services supplied by foreign suppliers, with long periods payback (aircraft, new production lines, construction of factories, high-tech equipment, engineering products, etc.). VTB provides long-term financing with amortization to a corporate client for the purchase of imported equipment / payment for the services of a foreign counterparty at the expense of attracted tied funding from foreign financial institutions, while ECA guarantees a transaction to increase the terms and reduce the cost of financing (it is also possible to defer payment up to 2 years to pay the main amount of debt).
ECA Covered Financing Scheme (based on letter of credit) ECA Covered Financing Scheme (refinancing without letter of credit)Post-import financing is provided for importers of goods and services (commodities, food, agricultural products, machinery and equipment, spare parts, etc.) supplied by foreign exporters. Depending on the subject of the contract and the counterparty country, VTB is ready to arrange post-import financing for up to 5 years.
Currently, post-import financing is implemented through a letter of credit scheme with deferred payment and discounting. When carrying out this operation, VTB, on behalf of the importing client, opens a letter of credit with a deferred payment, which is discounted by a foreign bank when documents are provided by the exporter. In fact, the Client receives a deferred payment for a designated period (up to 5 years) for favorable rate despite the fact that the foreign exporter receives the money immediately upon shipment/submission of documents to a foreign bank.
This form of financing is by far the most beneficial for the Client due to the optimal conditions for discounting. foreign banks cooperating with VTB.
Post-import financing scheme (letter of credit with deferred payment and discounting)Full information on letters of credit can be found in the "Letter of credit operations" section.
Bank guarantees issued by VTB Bank under counter-guarantees of foreign banks allow the importer to mitigate the risk of non-performance by a foreign supplier (including a foreign contractor for construction project) obligations under the contract.
VTB Bank also organizes the issuance of payment guarantees by foreign banks in favor of foreign exporters/contractors.
To support the export of companies, VTB Bank offers a wide range of products and services for trade and export finance related financing, guarantee operations, and documentary operations for banks.
Tied financing is intended for VTB Bank clients engaged in foreign trade activities. VTB provides loans to corporative clients at the expense of attracted tied interbank funding from foreign financial institutions, with the main focus on short-term financing.
The advantages of tied financing are the availability of significant amounts of funds, lower cost of lending for VTB clients, as well as simple and fast structuring and implementation of the operation.
Tied funding scheme Warranty operations and confirmation.Within this area, VTB offers the following services:
VTB Bank guarantees the fulfillment of the obligations of foreign importers. In the event of non-fulfilment of the terms of the contract and the Beneficiary presents a demand for payment in accordance with the terms of the guarantee, VTB Bank shall pay the amount of the demand. VTB Bank also organizes the issuance by foreign banks of guarantees for the return of an advance/fulfillment of obligations in favor of foreign importers/customers.
Closes the risk of non-payment by the importer of obligations to the exporter under the contract. Upon presentation of the shipping documents stipulated by the terms of the letter of credit, VTB Bank undertakes to make payment for the amount of the documents, even if the importer and its bank are not able to pay for the delivered goods. The product also allows the exporter to avoid accounts receivable Low quality.
Allows the exporter to provide a foreign counterparty with a deferral of payment for the delivered goods using the credit funds of VTB Bank. In this case, the supplier receives payment immediately upon presentation of shipping documents, credit limit the same is used on the importer's bank.
