mitigating international trade risk global supply chain management conference state university of...
TRANSCRIPT
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
Source: World Trade Organization Secretariat March 26, 2010 Press Release
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?
Global View
What Industries were impacted
•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
% change by Quarter valued in Current US$, Source WTO Secretariat estimates
Industry SECTORS Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009Manufactures All 13.2 -10.4 -27.6 -29.8 -21.5
Iron and Steel 42.7 5.4 -37.3 -54.7 -55Chemicals 21.7 -5.9 -23.5 -24.4 -16.6
Office and Telecom 7.2 -13.9 -28.4 -22.2 -15.3Automative Products 3.4 -26 -46.9 -45.6 -28.6
Industrial Machinery 15.7 -7.3 -28.8 -36 -31.9Textiles 3.4 -12.8 -26.9 -26.8 -17.3
Clothing 7.9 -2.5 -10.4 -15.5 -12.1
Global View
How did the crisis impact the US?
Major Changes reflected in 2009•Imports decline -26% all sectors (consumer demand)
• Exports- declines 18% support of global nature of recession
•Trade Deficit Declined $315 billon 39% improvement (not adjusted for Oil Price changes)
January 2010.. President Obama has initiated a directive to double US Exports over the next 5 years
{$ in billions} Year over Year change2005 2006 2007 2008 2009
US EXPORTS 901 1,025 1,148 1,247 1,056 US IMPORTS 1,673 1,853 1,956 2,103 1,557
US TRADE BALANCE (772) (827) (808) (816) (501)
US Only View
TOP TRADE Partners? US Only View
What would the impact be by doubling Exports?
Top US Trading Partnes 2009 based $ value (Billions) Country Exports Imports Balance What do we Buy? What do we Sell?
Canada 202 225 (23) Oil & Gas, Autos Indust'l Mchs, Autos, AgricMexico 129 177 (48) Crude,Auto's Elect'l Appl, Telecom Indust'l Mchs, Metal, Food/AgricChina 70 296 (227) Houshold,Elect'll gds, Computrs Metals,Chem/Plstcs,Indust'lJapan 51 96 (45) Auto/prts,Comptrs,Indust'l Mchs Agric, Chem/ Plstcs, Civil Aircraft
United Kingdom 46 48 (2) Medical Equip,Auto,Aircraft Prts Metals,Indust'l Mch, Civil Aircraft/prtsGermany 43 71 (28) Auto,Medical Equip, Indust'l Mchns Auto prts,Pharmaceutical,Mchry/Elct
Netherlands 32 16 16 Petro Prds,Indust'l Mchn, Nuclear Fuel Cheml/Plstc,Pharm'l,Petro/FuelSouth Korea 29 39 (11) Autos,Household Gds,Computr/Prts Plstc/chem, Indust'l Mchn, Agric
France 27 34 (8) Civil Aircraft, Medical Equip, Alchlc Bev Aircrft/prts,Industt'l Mchnes, Pharm'lBrazil 26 20 6 Crude,Metal/Alloys, Cv'l Aircrft Platic, Indust'l Mch, Cv'l Aircraft
Singapore 22 16 7 Comptrs, Medical, Organic Chem Plstc/chem, Indust'l Mch,SemicndctsTaiwan 18 28 (10) Comptrs/tecm, Hshold gds, Eletrc Semicndctrs,Indust'l Mchns, Agric
Italy 12 26 (14) indust'l Mch,Petro Prds, Med Equip Indust'l Mchs,Metals, Pharm'lIndia 16 21 (5) Apparel,Jewlery/Diamonds, Med.Equip Metals,Indust'l Mch,
Venezuela 9 28 (19) Crude/Oil related PdtsAll others 324 415 (133)
1,056 1,557 (501)
New Realities in International Finance
Cross Border Sales and Purchases will have added complexities We will focus on three implications : Liquidity, Risk and Credit.
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
Objective: Extend Payment Terms 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
Buyer SellerContractNegotiations
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
Buyer Seller
ContractNegotiation
s
Less AdvantageousLess Advantageous
Low
HighR
isk Ris
k
High
Low Doc.
Collection- against
Payment Documentary
Collection
Open Acct Purchase
Open Acct Sale
Cash in Advance
Pre pay- Cash in Advance
Letter of Credit
Confirmed L/C
Letter of Credit
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
(1) Sales Contract
Purchase Order
Proforma Invoice
(2) L/C Application
(3) Original Letter of Credit
SWIFT/Telex/Mail
(4) Original Letter of Credit to Seller/Exporter/Beneficiary
(5) 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
(9)(6)(10A)(10B)
Seller/Exporter/
Beneficiary
Buyer/Importer/Applicant (1)
(7)
(8)
Advising/Advising/Negotiating/Negotiating/ConfirmingConfirming
BankBank
(2)
(3)
IssuingBank
(4)
Goods (5)
(11)
How Letters of Credit Really Work
Foreign Buyers
Foreign Buyers
Buyer’s Banks
Buyer’s Banks
Advising Banks
Advising Banks
Seller’s Bank
Seller’s Bank
SellerSeller
Advising Banks
Advising Banks
Freight Forwarder
Freight Forwarder
Reimbursing Banks
Reimbursing Banks
Contract
L/C Appli-cation Docu-
ments
Debit
L/C
L/C
L/C
L/C & Documents
DocumentsPayment
Payment
Reimbursement Authorization
Reimbursement
Goods
Goods
Reimbursement Claim
Documentary Collection Transaction Flow
Documents (4)
Documents (6)
Money (7)
Buyer/Importer/Drawee
Contract (1)
Seller/Exporter/Principal
Collecting
Bank
Remitting
Bank
Money (5) Documents (3)
Money (8)
(1) Seller and buyer negotiate a sales contract or purchase order providing for payment by documentary collection (documents against payment/acceptance).
(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.
(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.
Goods (2)
Documentary CollectionAdvantages• 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 CreditRepresents 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 ServicesNon-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 ProgramsLending (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 managementKey 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.
© 2007 KeyCorp
Boston 800.539.3679 617.350.8480
New York800.539.3679917.368.2323
Cleveland 800.990.7647 216.689.5206
Seattle 800.304.1402 425.709.4389
KeyBank delivers the convenience, expertise, products, and technical capabilities you need to achieve your objectives.
Contact a Key Foreign Exchange Professional near you:
Superior technology and expertise for superior risk managementOur 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 coverageOur 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.
Advisory services• 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
Transaction 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
Key can assist you with a comprehensive portfolio of products and services:
key.com/foreignexchange
Bobby Uy Vice President
Senior International and FX Sales (585) 238-4155
Contact Information